Chapter 2, Problem 2.2BYP

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 Cash

25,000

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 Cash

12,000

12,000

(This is for bonuses paid to salespeople. I know they’re part of overhead, and I can’t Und 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 Cash

120,000

120,000

(This is for the factory workers’ wages. I have a note that employer payroll taxes arc $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 1 credited Cash for the wages and the taxes.)

(4)

Work in Process Inventory Raw Materials Inventory

3,000

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.)

Instructions

(a) How should Joe have recorded each of the four events?

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