Question
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
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 presidents 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:
(1) | ||||
Work in Process Inventory | 25,000 | |||
Cash | 25,000 | |||
(This is for materials put into process. I dont find the record that we paid for these, so Im crediting Cash because I know well have to pay for them sooner or later.) |
(2) | ||||
Manufacturing Overhead | 12,000 | |||
Cash | 12,000 | |||
(This is for bonuses paid to salespeople. I know theyre part of overhead, and I cant find an account called Non-Factory Overhead or Other Overhead so Im putting it in Manufacturing Overhead. I have the check stubs, so I know we paid these.) |
(3) | ||||
Wages Expense | 120,000 | |||
Cash | 120,000 | |||
(This is for the factory workers wages. I have a note that employer payroll taxes are $18,000. I still think thats part of wages expense and that well have to pay it all in cash sooner or later, so I credited Cash for the wages and the taxes.) |
(4) | ||||
Work in Process Inventory | 3,000 | |||
Raw Materials Inventory | 3,000 | |||
(This is for the glue used in the factory. I know we used this to make the products, even though we didnt use very much on any one of the products. I got it out of inventory, so I credited an inventory account.) |
If the entry (1) was not corrected, which financial statements (income statement or balance sheet) would be affected? What balances would be overstated or understated?
My Answer: The cash account would be understated in the amount of $140,000, which would in turn credited cash for two entries, the process inventory and wages. Cash for both of the entries are incorrect because issuing inventory into the work in process means they were paid but they were actually not. Both entries reflect that the entries were paid, the asset portion of the balance sheet would be understated by $145,000.
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 Answer: Although it wouldn't necessarily change the income statement, the bonus's paid were originally debiting the overhead account, when it should be corrected to the bonus account so its properly documented to the bonus account. Although it won't affect the income statement, it should be corrected.
If the entry (3) was not corrected, which financial statements (income statement or balance sheet) would be affected? What balances would be overstated or understated?
My Answer: Although it wouldn't necessarily change the income statement, the bonus's paid were originally debiting the overhead account, when it should be corrected to the bonus account so its properly documented to the bonus account. Although it won't affect the income statement, it should be corrected.
If the entry (4) was not corrected, which financial statements (income statement or balance sheet) would be affected? What balances would be overstated or understated?
My Answer: Glue is an item within the inventory therefore there was no correction required for this entry.
Professor Feedback:
1. You did not explain how Inventory would be reported incorrectly and did not state which financial statement is affected by this incorrect journal entry.
2., 3., & 4. Both the income statement and balance sheet are affected in this situation. Tell me exactly how and state which accounts are affected and which financial statement they are reported on. For example: "On the balance sheet, account XYZ is understated".
2. OH is a product cost and is not separately reported on the financial statements. What accounts are impacted on the financial statements when product costs are recorded incorrectly (hint: COGS and closing process of temporary accounts on the I/S to the B/S)? I specifically discuss this in the recorded video lecture posted in the course announcements and covered in Chapter 4 of the text in GB518.
Note: The original intent of the entry is to record Sales Bonus but the Sales Bonus Expense account was not used.
Note: Inventory is not impacted in this entry because the over/under-applied manufacturing OH is closed out to COGS directly then COGS is closed out to Retained Earnings.
3. Factory wages are OH (i.e. a product cost) and is not separately reported on the financial statements. What accounts are impacted on the financial statements when product costs are recorded incorrectly (hint: COGS and closing process of temporary accounts on the I/S to the B/S)? I specifically discuss this in the recorded video lecture posted in the course announcements and covered in Chapter 4 of the text in GB518.
When payroll is processed there are 4 accounts used. For factory wages, they are: Wages Expense, Factory Wages Payable, Employer Tax Expense, and Employer Taxes Payable.
Note: Inventory is not impacted in this entry because the over/under-applied manufacturing OH is closed out to COGS directly then COGS is closed out to Retained Earnings.
4. OH is a product cost and is not separately reported on the financial statements. What accounts are impacted on the financial statements when product costs are recorded incorrectly (hint: COGS and closing process of temporary accounts on the I/S to the B/S)? I specifically discuss this in the recorded video lecture posted in the course announcements and covered in Chapter 4 of the text in GB518.
Note: Inventory is reported at the aggregate amount of RM, WIP, FG. The errors offset in this entry and do not affect Inventory on the B/S. Assume the units in WIP were sold (i.e. impacting COGS). Also, Inventory is not impacted in this entry because the over/under-applied manufacturing OH is closed out to COGS directly then COGS is closed out to Retained Earnings.
Example:
Balance Sheet
Cash = Overstated
Retained Earnings = Overstated
Income Statement
Cost of Goods Sold = Understated
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