Question

A. EasyBaker makes and sells baked goods to corporate and institutional clients. Presented below are account balances or other information as of 12/31/2017 or for the year 2017 for EasyBaker:

Prop, Plant, & Equip. $15,000

Cash Collected from Customers $31.000

Materials used in production $2,800

Cost of Goods Sold $9,000

Materials Purchased $3,100

Sales Office expenses $500

Salaries* and Bonuses $4,000

Accumulated Depreciation $3,500

Increase to Accounts Receivable $1,200

Salary Payable $900

Marketing $1,500

Cash $2,300

* 50% of salaries/bonuses for production employees; 50% for sales/admin

B. Upon review by the accounting department, it turns out that the $1,500 classified as “Marketing” was actually to purchase a large inventory of spices (not included in $3,100 materials purchases above) because the price is anticipated to increase significantly very soon. None of the spice has yet been used. (7 points)

How (and how much) would this new information change the 2017 income statement? ___________________________________________

How (and how much) would this new information change the 12/31/2017 balance sheet? ____________________________________________

Would your answer related to the change to the income statement be different if it turns out that they have not yet paid the $1,500 bill for the spice? Yes___ No___

Answer 1

B.

In Income Statement -
$1500 is recorded as Marketing Exp which increases total expenses and reduces Net income by $1500.
$1500 should be recorded as material purchased
and
It will be in closing inventory because none of these spice has yet been used.

As a result,
Net income will increase by $1500 due to reduction in total expenditure.

In balance sheet -
under currect asset, The closing inventory balance will increase by $1500
and
Under Share horder's equity, The Profit & loss balance will increase by $1500.

How (and how much) would this new information change the 2017 income statement?
Ans - In income statement, Net income will be increased by $1500

How (and how much) would this new information change the 12/31/2017 balance sheet?
Ans - Under Current Asset, Closing inventory will be incresed by $1500 and Under Share holders's equity, share holder's fund will increase by $1500

Would your answer related to the change to the income statement be different if it turns out that they have not yet paid the $1,500 bill for the spice?
Ans - No. The answer remains same.
Purchase is related to year 2017. So, as per GAAP rules (accrual basis), it should be recored in material purchased for 2017.