[IWantToBeACPA]

Accounts Payable Year End Adjustment question?

I have a question about year end adjustments. I have the answer but do not understand why that’s the answer.

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

My question is if A/P is debited…that means A/P was paid…then why is it being added to A/P (it signifies that it needs to be paid)?

Please answer so I can finally understand why that’s the answer? Thanks so much in advance.

First attempt at any section of the CPA exam....FAR May 31, 2011.

[Anonymous]

I am a little confused by your question- are you asking about why you reverse the 50,000 and record that as a prepaid asset instead? If so, maybe I can help clarify-

Ross had not invoiced Lyle company for any type of purchase. The 50,000 was paid in advance of any work being done. Your A/P account is really strictly to record current liabilities (invoices, etc) that have occurred in the course of normal business. Look at the 50,000 as a “deposit” for work that will be done, but has not already been completed, thus no liability has occurred on Lyle's side.

The 100,000 of checks you reverse is because Lyle really hasn't paid that money yet, they didn't go out the door until the following year. Thus at the close of they year Lyle company still really owed that money. A/P was understated by the value of those checks. Think about paying your cable bill- if you haven't mailed it yet, you still owe it, right?

Does that make sense? hope that helped…

[whitesoxfancpa]

Starting $360,000

You have to credit AP $50,000 because the advance payment should be reclassed to a prepaid expense. So credit AP, debit prepaid expenses for $50,000, just like you said.

For the $100,000 checks, they were recorded already, so AP was debited for $100,000 and cash was credited for $100,000. This is already reflected in the $360,000 ledger balance. Since they were not mailed until January, you have to reverse that entry, which means debit cash and credit AP for $100,000.

So $360,000 + $50,000 + $100,000 = $510,000.

Hope that helps. If you draw out the ORIGINAL journal entries that are already reflected in the ledger balance of $360,000, then just look at it as adjusting those entries, it makes it a bit easier, at least it did for me.

AUD 96 FAR 95 REG 94 BEC 88

[IWantToBeACPA]

Wow thank you so much guys!! I wish I joined this forum months ago!

First attempt at any section of the CPA exam....FAR May 31, 2011.

[JamesKol]

I know this a very old post but would the debit in Accounts Payable be considered an error made by Lyle? I never heard of AP having a debit balance aside from decreasing it.

[DB917]

@jameskol technically yes. Lyle should have recorded this advance payment probably as a prepaid expense or a deposit since they paid a supplier in advance for goods they have not yet received.

[JamesKol]

Thank you for the response. Didn't think I'd get one since the post is so old. I'm only an Intermediate 2 student and our teacher is giving us questions like this to prepare for the CPA Exam. Are the questions more difficult on the actual exam than the one above? I'm asking since it looks like you've passed all 4 tests. Thanks.

[AGI]

@JamesKol

You are going to get almost identical questions on the CPA exam, maybe on the sims.

I think the “prepare for the CPA Exam” is just an excuse. Your professor give questions from the test bank. Every textbook has a test bank, which is basically retired CPA questions. Almost every professor do this. SO, IF YOU WANT GOOD GRADES YOU KNOW WHAT TO DO.

New York - NYC
Passed CPA Exam (11/2014)
In search for a position in NYC that will fulfills the license requirement.

[Author]

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