[Hopefulcpa1234]

Hi all,

These 2 questions from Becker are making my head hurt. It seems to be the same fact pattern but the solution is saying two opposite things. Any help would be appreciated.

Question 1:

Lyle Inc is preparing its financial statements for the year ended December 31, 1992. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following:

–At December 31, 1992 Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle’s specifications.

–Checks in the amount of $100,000 were written to vendors and recorded on December 29, 1992. The checks were mailed on January 5, 1993.

What amount should Lyle report as accounts payable in its December 31, 1992 balance sheet?

a) $510,000

b) 410,000

c) 310,000

d) 210,000

Answer a is correct.

Unadjusted accounts payable at 12/31/92 $360,000

Reverse debit balance and record as a prepaid (asset) 50,000

Reverse unmailed checks 100,000

Adjusted accounts payable at 12/31/92 $510,000

Question 2:

Acme Co.’s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information:

At December 31, Acme has a $50,000 debit balance in its accounts payable resulting from a payment to a supplier for goods to be manufactured to Acme’s specifications. Goods shipped F.O.B. destination on December 20 were received and recorded by Acme on January 2, the invoice cost was $45,000.
In its December 31 balance sheet, what amount should Acme report as accounts payable?
a. $850,000
b. $895,000
c. $900,000
d. $945,000

Choice “C” is correct. The $50,000 payment to a supplier for goods to be manufactured to Acme’s specifications should not be included in accounts payable as a payment has already been made. This prepayment should have been recorded by debiting a prepaid asset, not accounts payable. The removal of this debit will increase accounts payable to $900,000. The goods shipped F.O.B. destination (title goes to the buyer when the buyer receives the goods from the common carrier) were not received until January 2nd, so they should not be included in accounts payable at year-end.
Choice “a” is incorrect. Accounts payable is understated by $50,000. The removal of this debit will increase accounts payable to $900,000.
Choice “d” is incorrect. This choice incorrectly adds the $45,000 for the goods shipped F.O.B. destination to year-end accounts payable. It should not be counted, as title does not pass until the goods are received. In addition, accounts payable needs to be credited for the $50,000 payment to Acme’s supplier.
Choice “b” is incorrect. This choice incorrectly adds the $45,000 for the goods shipped F.O.B. destination to year-end accounts payable.

I am so confused. In the first question it is saying to add to Accounts payable and in the second one it is saying to subtract from Accounts payable. HELP!

[AndreA]

Question 1:
Dr: Prepaid Expense 50,000
Cr: AP 50,000

Dr:Cash 100,000
Cr:AP 100,000

AP Balance: 360,000-50,000+100,000=410,000
I don't know why the answer is 510,000

Question 2:
Dr: Prepaid Expense 50,000
Cr: AP 50,000

AP Balance: 850,000+50,000=900,000
This one is correct.

[etg1991]

you are adding in both questions, I'm not sure where you see the subtraction part

[Hopefulcpa1234]

Oh jeez I think I was staring at these problems for so long that I was reading one of them wrong. Thanks Ela and AndreA. I guess I am still wondering why you would assume that a prepaid would be a credit to A/P and not a credit to cash?

[NYSCPA]

I'm young, but old school. That said, Best way to view this is T Table. For 1) Year end balance of AP is $360,000, A component of that $360,000 is a $50,000 Debit Balance.

_____AP_______
50,000 ! 410,000
!
!
_________________
360,000
To move the $50k to prepaid, you have to credit AP and debit Prepaid Assets. That brings the AP Balance to $410,000. When the Checks were written the entry was Debit AP and Credit Cash. Since checks were mailed until next year, AP at the end of the year is understated. So once you reverse that the balance goes from $410,000 to $510,000.

“I guess I am still wondering why you would assume that a prepaid would be a credit to A/P and not a credit to cash?” See My T chart above. that $50k debit is baked into the YE balance already. That's the only way we know that they erroneous debited AP instead of Prepaid Assets.

[MaLoTu]

I guess I am still wondering why you would assume that a prepaid would be a credit to A/P and not a credit to cash?

When AP enters an invoice they debit expense (dr expense cr AP) and when they pay they cr cash dr AP.
In this case they must have cr cash debit AP which is super ridiculous but it can happen. Also in this case it was not expensed so there would be no reversal of that. They would reverse the AP debit by crediting the amount and then put it to prepaid by debiting the amount. The cash has already been properly credited and must have went out to even have a prepaid. So you don’t need to mess with cash. When they receive the asset they will cr prepaid and dr expense.

[AndreA]

Sorry, I made a mistake AP Balance: 360,000+50,000+100,000=510,000

[Author]

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