This is the first part of the question from my homework:

In the course of routine checking of all journal entries prior to preparing yearend
Reports, Sally Yount discovered several strange entries. She recalled that the president’s
Son Ken 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 Ken
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.)

I only have a question on the 2nd portion. I know that debiting Manufacturing Overhead was incorrect, and that crediting cash was correct. I have adjusted it to Debit "Salaries & Bonuses". My question lies in where the mistake would show up (financial statements at the end of the year) if not corrected and what balances would be overstated or understated. I have tried my best to figure this out, but have note been able to wrap my head around it. I would even appreciate just being pointed to a reputable website. I am just stuck and don't understand how to figure that out! Thanks so much for any help.

I really hate it when president's sons come in and try to do the books. (In reality, that is such a really, really bad idea, even if they're a CPA, to have someone randomly doing work without specific job duties. It gave me the shivers to read that. :p)

Your correcting entry is correct.

OK, here's how we think through how the statements will get affected.

Only the debit is incorrect, so that's all you need to worry about. Let's start with what would have been correct: debiting to the salaries expense. It was supposed to go into this expense account, but did not get there. So first you think: what statement would that be on? And how would expenses be affected by a missing post? And if expenses are affected, what does that do to net income? You further have to deal with the fact that anything affecting net income affects what other account?

Now, even trickier in this case... what happens with the fact that it went into overhead instead. Where does overhead end up? You credit out of overhead when it's applied and do what with it? Now here is the really, really tricky part. We have no idea whether it ever went any further than this.

Remember this is manufacturing with 3 inventory accounts: material, WIP and finished goods. We know it's not material so that's no problem. But is it in process? Did it move to finished goods? Did it get sold and end up in COGS? We don't know.

It would help if we knew if these bonuses happened over the course of a full year. If that was the case, it would be reasonable to assume that most of what a company has put into production has been finished and sold, and we could make a better assumption it's in COGS. And since over- and under-applied overhead (except more intermediate level cost accounting) generally also gets put into COGS, we could then assume everything went there. However, if this was right at the end of the year, then it's much more likely it's still in WIP or in Finished Goods. (Maybe you have more info available.)

But regardless, the process is still the same. If we assume it's in COGS, again, what kind of account is that, what statement does it go on, etc? Same questions we had before. But this time you have to keep in mind that it's there when it should NOT be. If it's in WIP or Finished Goods, what kind of accounts are those, and what statement would they be on?

You're welcome to send in what you think this might be. If you decide the overhead stuff would have ended up all the way to COGS, I'd be curious how your final answer comes out. :)

1. The Credit entry should have been: Credit Raw materials Inventory.

I only have a question on the 2nd portion.

This was only about part 2.

The entry for number 1 is incorrect and I was pointing it out to Shellfishy.

Shellfishy never gave an answer to #1. Those notes in parenthesis are the explanations by the president's son - the point of the problem was to fix his errors.

Yeah, I figured that out. :)