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?

For entry 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. Raw materials is an asset and not reported on the income statement. It is a product cost. The WIP account is overstated because of the extra debit entry. Assuming all the units in WIP were sold, what does this do to the I/S and subsequently the B/S?

I need answer to that. Thanks

Answer 1

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Explanation: a) The correct journal entries should have been S.No. Description Debit ($) Credit ($) 1 Work in Process 25,000 Raw Material Inventory 25,000 12,000 12,000 2 Bonus Expenses Cash 1,20,000 3 Wages Expense Payroll Taxes Payable Wages Payable 18,000 1,02,000 3,000 4 Work in Process Raw Material Inventory 3,000 b) If the corrections are not made to the journal entries both the financial statements - Income Statement and Balance Sheet would get im- pacted and would not show the correct picture.

In Balance Sheet Cash will be Understated since it has been cred- ited excessively by (25000+120000) = $145,000 Payroll Taxes Payable will be Understated since there is no liability accrued Wages Payable will be Understated since there is no liability accrued Raw Material Inventory will be overstated by $25,000 since it was not credited even when the stock was put in production process. In Income Statement Manufacturing Overhead Overstated and Bonus Expense Understated since expense was booked in incorrect category.

Explanation 1. When raw materials are transferred to WIP goods, they should be credited to Raw Material In- ventory account. 2. Bonus paid to employees should be debited to Bonus expense and not clubbed as a part of man- ufacturing overheads. 3. Both payroll taxes and wages were unpaid when the entry was booked and hence the company should recognize a liability for these. 4. The entry booked was correct and no adjust- ment is required to be made.