Expand Your Critical Thinking 15-02 b1-b4 (Essay)

In the course of routine checking of all journal entries prior to preparing year-end reports, Betty Eller discovered several strange entries. She recalled that the president's son Joe had come in to help out during an especially busy time and that he had recorded some journal entries. She was relieved that there were only a few of his entries, and even more relieved that he had included rather lengthy explanations. The entries Joe made were:

(2)Manufacturing Overhead

12,000Cash12,000(This is for bonuses paid to salespeople. I know they're part of overhead, and I can't

find an account called "Non-Factory Overhead" or "Other Overhead" so I'm putting it in

Manufacturing Overhead. I have the check stubs, so I know we paid these.)

Question

If the entry (2) was not corrected, which financial statements (income statement or balance sheet) would be affected? What balances would be overstated or understated?

MY CURRENT RESPONSE

The bonus payment to sales staff should not be part of manufacturing overhead as it is a nonmanufacturing costs so the sales bonus expense would be understated on the income statement. Manufacturing overhead is overstated because the payment to sales personnel is not part of manufacturing costs impacting cost of goods sold on income statement and Net income is overstated resulting in an overstated retained earnings on balance sheet affecting owner's equity.

INSTRUCTOR FEEDBACK

10/27

2. As stated in previous grading feedback, OH is a product cost and is NOT separately reported on the financial statements.What accounts are affected when product costs are not correct?(hint: COGS)This entry is related to sales bonuses but you did not discuss the impact on the Sales Bonus Expense account.

10/26

2.If COGS is incorrect as you correctly stated, then Net Income is not correct on the I/S.What impact does this have on the B/S (hint: closing process)?