which financial statements (income statement or balance sheet) would be affected? What balances would be overstated or understated?

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:

Entry 1:

Balance Sheet

Cash: Understated

Raw Materials Inventory: Overstated

Entry 2:

Balance Sheet

Payroll Taxes Payable: Understated

Bonus’s Paid to Salespeople: Understated

Income Statement

Cost of Goods Sold: Overstated

Entry 3:

Balance Sheet

Cash: Understated

Income Statement

Wages Payable: Overstated

Payroll Tax: Overstated

Entry 4:

Glue is an item within the investory therefore there was no correction required for this entry.

Instructor Feedback 

1.         Correct.

2.         “Bonus’s Paid to Salespeople” is not a general ledger account.  As stated in previous grading feedback, the original intent of the entry is to record Sales Bonus but the Sales Bonus Expense account was not used.

If COGS is incorrect as you correctly stated, then Net Income is not correct on the I/S.  What impact does this have on the B/S (hint: 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 this is covered in Chapter 4 of the text in GB518.

3.         What “Payroll Tax” account is overstated?  Expense or Liability?

cwhen 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.

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. As stated in previous grading feedback, BOTH the I/S and B/S are affected.