Question

Expand Your Critical Thinking 15-02 b1-b4 (Essay)

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 (2) was not corrected, which financial statements (income statement or balance sheet) would be affected? What balances would be overstated or understated?

Answer 1

Correct entries:

Transaction	Account Titles	Debit	Credit
		$	$
1.	Work in Process Inventory	25,000
	Raw Materials Inventory		25,000
	For materials issued to production
2.	Sales Salaries Expense	12,000
	Cash		12,000
	For bonuses paid to salespeople
3.a..	Work in Process Inventory	112,000
	Factory Wages Payable		112,000
	For factory wages incurred
3.b.	Payroll Tax Expense	18,000
	Payroll Taxes Payable		18,000
	For payroll tax expense
4.	Manufacturing Overhead	3,000
	Raw Materials Inventory		3,000
	For cost of indirect materials issued to production

Manufacturing overhead is part of product cost, while bonuses to salespeople is period expense.

If entry no. 2 is not corrected, cost of goods sold would be overstated in the income statement, or if all goods are not sold, ending inventory in the balance sheet would be overstated.

If cost of goods sold gets overstated, gross margin would be understated on the income statement.

If entry no. 3 is not corrected, Cost of Goods Sold would be understated in the income statement, Work in Process Inventory (asset) would be understated in the balance sheet, Cash (asset) would be understated in the balance sheet, Wages Payable ( liability) would be understated in the balance sheet.

If entry no. 4 is not corrected, there would be no effect, as Manufacturing Overhead would ultimately be applied to Work in Process Inventory.