BYP2-2 Managerial Analysis
In the course of routine checking of all journal entries prior to preparing year-end reports, Diane Riser discovered several strange entries. She recalled that the president’s son Ron 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 Ron 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
|
3. Wages Expense |
120,000 |
|
Cash |
120,000 |
(This is for the factory workers’ wages. I have a note that payroll taxes are $15,000. 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 |
Instructions
a. How should Ron 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?