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 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?

Answer 1

1	If the entry was not corrected then the entry would be like this only
	Work in progress account… Dr					25000
	To Cash account					25000
	However since the payment is still not done on the part of the company and the entry should be like this only
	Work in progress account… Dr					25000
	To Sundry creditors					25000
	So the cash would be understated by 25000 and balance sheet assets side woulld be affected
	and the sundry creditors would be also understatedby 25000 and balance sheet liability side would be affected
2	If the entry was not corrected then the entry would be like this only
	Manufacturing overhead (i.e trading account)… Dr					12000
	To Cash account					12000
	Howver the payment is made for the purpose of the sales personnel and those are not in directly related to the manufacturing hence the amount would not be covered under the same
	These amount would be covered under the indirect expenses and indirect overhead
	Entry passed would be as follows
	Indirect overhead account… Dr					12000
	To cash account					12000
	It would impact the valuation of the COGS, Inventory and Indirect overhead in the income statement
3	If the entry was not corrected then the entry would be like this only
	Wages expenses account					120000
	To cash account					120000
	However since the amount of Rs. 18000 is payable to the governement for the amount of the taxes and the sameis still not paid by the company
	Hence the amount would be shown as payable in the balance sheet of the company
	The correct wuold be like this only
	Wages expenses account					120000
	To cash account					102000
	To Government taxes payable					18000
	Since the amount of 18000 still not paid hence the cash was understated by 18000 and government taxes payable understated by 18000
	and the both are balance sheet items
4	If the entry was not corrected then the entry would be like this only
	As per the understanding of the question it is being assumed that glue is not a part of the inventory
	and since whenver it purchase directly transfer to the expenses account
	In this case instead of the crediting of the cash account
	The company has credited the inventory account
	Wrong entry wouuld be like this
	Work in progress account					3000
	To Raw material inventory					3000
	Correct entry would be like this
	Work in progress account					3000
	To cash account					3000
	Raw material inventory is understated by 3000 and the cash is overstated by 3000