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 Cash25,000(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 Cash12,000(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 Cash120,000(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 Inventory3,000(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? (my response in italic)

The salaries and wages expense would have been used instead of manufacturing overhead because it is related to the bonuses paid to the salesperson and these bonuses should be considered as wages expense. This entry would have affected the income statement as all the expenditures related to wages are recorded on the income statement. The account of salaries and wages would have been understated if no entry was recorded in the name of this account and the manufacturing overhead account would have been overstated with a debit entry in the name of this account.

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? (my response in italic)

The income statement would have been affected because the salaries and wages expenses are reported on the income statement. By not recording tax expense individually the entry would have the overstated. The amount in wages expense would have been 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? (my response in italic)

This would have affected the balance sheet because all inventory items are recorded and reported on the balance sheet. The manufacturing overhead account would have been credited instead of raw materials account and due to this mistake the manufacturing overhead account would have been understated.

Here is what I am being told is wrong with my responses per my prof:

Product costs (materials, labor, overhead) are not separately reported on the financial statements. What accounts reported on the financial statements are impacted when these are incorrect?

2., 3., & 4. Both the income statement and balance sheet are affected in this situation. Tell me how and state which accounts are affected and which financial statement they are reported on.

What am I missing?

Thanks

Answer 1

Question No 2.

Since the payment made was fir sales people the same shall be reported under the head Selling expenses(sub head Salaries& wages.)

If this was not corrected this adjustment would have not overall effected the income statement, but it would had a internal effect on income statement. The increased manufacuring overhead would have increased product cost, at the same time the understated salaries would have resulted in understated selling expenses.

Now if we look towards balance sheet this would have left a effect on value of closing inventory(because inventories are recorded on cost/market price whichever is lower). Had this adjustment not been corrected the cost price of inventories might have shoot up(because manufacturing overhead is added to cost of inventories). Since the closing inventory is reported on balance sheet this would have affected balance sheet.

3.Tax expenses of rs 18000

To income statement it won't have any overall effect. It will just be the error of posting. If not corrected the wages might have shown rs 18000 more and employee payroll tax rs 18000 less.

To balance sheet it would have affected both the asset and the liabalities side. To the asset side the cash would have shown rs 18000 less as joe assumed rs 18000 would be paid in cash, which might not happen, to the liabalities side there would be an outstanding employee payroll tax account of rs 18000.

4.

The incorrect posting of raw material of rs 3000 would increase the production cost and hence reducing the overall Income. And at the same time it would have reduced the balance sheet asset side by showing less of WIP.