betty eller discovered several strange entries B u s i n e s s F i n a n c e

Learning Goal: I’m working on a accounting question and need an explanation and answer to help me learn.

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:

(1)
Work in Process Inventory		25,000
Cash				25,000
(This is for materials put into process. I don’t find the record that we paid for these, so I’m crediting Cash because I know we’ll 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 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.)

(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 that’s part of wages expense and that we’ll 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 didn’t 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?

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?

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?

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?

Answers previously given:

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?

Balance Sheet

Cash: Understated

Raw Materials Inventory: Overstated

.

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?

Income Statement

Cost of Goods Sold: Overstated

Sales Bonus Expense: Understated

Balance Sheet:

Inventory: Overstated

Retained Earnings: Understated

.

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?

Income statement

Cost of Goods Sold: Understated

Wages Expense: Overstated

Balance sheet

Cash: Understated

Factory Wages Payable: Understated

Employer Tax Payable: Understated

.

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?

Inventory account (Net income/retained earnings balances): Overstated

Professor Feedback for answers above.

12/3

Part 6 not passed.

1. Correct

2. As stated in previous grading feedback, 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. As stated in previous grading feedback, 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. You did not discuss EACH of these accounts. You only discussed 3 of 4.

As stated in previous grading feedback, 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.

4. You did not answer the question asked. What accounts are over/understated on which financial statements. You did not specify any financial statement.

As stated in previous grading feedback, 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.

As stated in previous grading feedback, 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.

.

The professor is wanting the answer in the formatting used in previous answers:

Income statement

Cost of Goods Sold: Understated

Wages Expense: Overstated

Balance sheet

Cash: Understated

Factory Wages Payable: Understated

Employer Tax Payable: Understated