Question

Course Title: Principles of Accounting II Total No. of Pages: 11 Question 3 (Continue) Part B (12 marks) Boeing's accounting managers checked all journal entries, one manager name Elena discovered several strange entries. She did not know whether the accountants made those mistakes intentionally or un-intentionally. She was relieved that there were not too many strange entries and she found the mistakes in time. Also, the entries were recorded with some explanations. The weird entries were as follows: (5 Million) (1) $30 Work in Process Inventory $30 Raw Materials Inventory (This is for the lubricant used in the factory and working activities. Workers used this to build airplanes, 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. The amount is correct.) (ii) Manufacturing Overhead S240 Cash $240 (This is for bonuses paid to staff in marketing department. I know they are also part of overhead, and I cannot find an account called "Non-Factory Overhead" or "Overhead - Others" so I put it in Manufacturing Overhead. I have the check stubs, so I know we paid these.) (iii) Wages Expense $450 Cash $450 (This is for the factory workers' wages, I have a note that employer payroll taxes are $80. 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 taxes.) Required: How should accountants have recorded each of the three events? If the entry was not corrected, which financial statements (income statement or statement of financial position) would be affected? What balances would be overstated or understated? Explain. (12 marks)

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Answer 1

Solution

Correct Entries

Qi.

The entry is to record lubricant used in factory. Lubricants forms part of indirect materials and hence the same should be credited to Manufacturing Overhead account.

The correct entry would be,

Work in Process Inventory     Dr. $30

            Manufacturing Overhead        Cr. $30

(To record cost of indirect materials used in production)

Qii.

Bonuses paid to marketing staff do not form part of manufacturing overhead as marketing staff do not work in production. Though the bonuses paid to marketing staff form part of overhead, they are recorded as ‘Sales Overhead’ or ‘Sales and Administration Overhead’.

The correct entry would be,

Sales Overhead/Sales and Administration Overhead Dr $240

            Cash                                                                            Cr. 240

(To record bonuses paid to marketing staff)

Qiii.

The payroll taxes are recorded separately from wages expense. Payroll taxes do not form part of wages expense.

The correct entry would be,

Wages Expense           Dr. $370

Payroll Taxes Expense Dr. $80

            Cash                            Dr. $450

(To record wages expense paid and payroll taxes)