During the monthly internal audit in the end of March, Cheung’s senior accounting manager Sherry discovered three suspicious journal entries. She would like to further investigate whether the accountants made those mistakes intentionally. The three journal entries were summarized as follows. Luckily, there were notes recorded by the accountants together with those entries. 1. Manufacturing Overhead $2,000 Salary Payable $2,000 Notes: This is for salary expenses incurred but not yet paid to staff in the advertising department. As I am not able to find any “Non-factory Overhead” account to record it, I decided to put it under “Manufacturing Overhead”. 2. Factory Labor 160,000 Cash 160,000 Notes: This is to record factory labor costs for the month. The total amount of $160,000 includes the payroll taxes of $24,000. The remaining amount won’t be paid till April 15th. But because the payroll taxes will be paid in cash sooner or later, I credited Cash for the total amount. 3. Work in Process Inventory $90 Raw Materials Inventory $90 Notes: This is to record the lubricant used to lubricate the manufacturing machines. The amount is not much, but since it is used in manufacturing activities, I decided to record it as the use of direct materials. Question: Please write the correct journal entries for the three events above (Note: please provide the correct journal entries only, no need to reverse the incorrect entries). How will the wrong journal entries affect the company’s financial statements (income statement and/or statement of financial position)? Will the balances be overstated or understated? Please explain the effect(s) for each set of incorrect journal entries separately.
During the monthly internal audit in the end of March, Cheung’s senior
accountants made those mistakes intentionally. The three journal entries were summarized as follows. Luckily, there were notes recorded by the accountants together with those entries.
1.
Manufacturing
Salary Payable $2,000
Notes: This is for salary expenses incurred but not yet paid to staff in the advertising department. As I am not able to find any “Non-factory Overhead” account to record it, I decided to put it under “Manufacturing Overhead”.
2.
Factory Labor 160,000
Cash 160,000
Notes: This is to record
But because the payroll taxes will be paid in cash sooner or later, I credited Cash for the total amount.
3.
Work in Process Inventory $90
Raw Materials Inventory $90
Notes: This is to record the lubricant used to lubricate the manufacturing machines. The amount is not much, but since it is used in manufacturing activities, I decided to record it as the use of direct materials.
Question: Please write the correct journal entries for the three events above (Note: please provide the correct journal entries only, no need to reverse the incorrect entries). How will the wrong journal entries affect the company’s financial statements (income statement and/or statement of financial position)? Will the balances be overstated or understated? Please explain the effect(s) for each set of incorrect journal entries separately.
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