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 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?

I'm having reoccurring issues with entry 4. Here's my professor's comment below. Please help

For entry 4, both income statement and balance sheet are affect. Please discuss how they are affected, state which account are affected and which financial statement they are reported?

Also professor said 'assume that the units in WIP were sold. The costs in WIP are incorrectly debited in this entry. What does that do to the I/S since these products were sold? What does the error on the I/S subsequently do to the B/S?

Please I need answers to this. Thanks

Answer 1

Answer :

1.      (a)      Work in Process Inventory..................................................................  25,000

                             Raw Materials Inventory........................................................................             25,000

         (b)      If not corrected, the balance sheet is affected. Cash is understated and Raw Materials Inventory is overstated.

2.      (a)      Sales Bonus Expense.................................................... 12,000

                             Cash...........................................................................................  12,000

         (b)      Both the income statement and the balance sheet are affected. In the income statement, Sales Bonus Expense is understated, Income Tax Expense is overstated, and net income is overstated. The error causes the underapplied overhead to be overstated or the overapplied overhead to be understated. This affects Cost of Goods Sold, since the over- or underapplied balance is closed out to Cost of Goods Sold. The error in Cost of Goods Sold also has an effect on Retained Earnings. Also, Retained Earnings is overstated because of the over­statement of net income, and Income Taxes Payable is overstated.

3.      (a)      Factory Labor.............................................................. 120,000

                             Factory Wages Payable.............................................................. 102,000

                             Employer Payroll Taxes Payable................................................  18,000

         (b)      If not corrected, both the income statement and the balance sheet are affected. On the income statement, Cost of Goods Sold is under­stated and Wages Expense is overstated. On the balance sheet, Cash, Factory Wages Payable, and Employer Payroll Taxes Payable are understated.

4.      (a)      Manufacturing Overhead................................................. 3,000

                             Raw Materials Inventory................................................              3,000

         (b)      Both the income statement and balance sheet are affected. If units that were in process during the month have been sold, then in the income statement Cost of Goods Sold is overstated, Income Tax Expense is understated, and net income is understated. This causes the Retained Earnings and Income Taxes Payable in the balance sheet to be understated. Also the error causes underapplied overhead to be understated or overapplied overhead to be overstated. This affects Cost of Goods Sold, since the over- or underapplied balance
is closed out to Cost of Goods Sold. The error in Cost of Good Sold also has an affect on Retained Earnings.