[fferro09]

Hi all,

Can someone please help me understand this question and its explanation? The company had an AP balance of $850,000. Included in that amount is the payment the company  made to its supplier of $50,000.

So a debit of $50,000 was posted to AP. However, the answer states the debit should be to AR and removed from AP, resulting in a corrected AP balance of $900,000. What am I missing here?

Question:
“<span style=”caret-color: #3a3a3a; color: #3a3a3a; font-family: ‘Work Sans’, sans-serif; font-size: 20px;”>Acme Co.’s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information:</span>
<ul style=”box-sizing: border-box; margin-top: 0px; margin-bottom: 10px; caret-color: #3a3a3a; color: #3a3a3a; font-family: ‘Work Sans’, sans-serif; font-size: 20px;”>
<li style=”box-sizing: border-box;”>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.

<li style=”box-sizing: border-box;”>Goods shipped FOB destination on December 20 were received and recorded by Acme on January 2; the invoice cost was $45,000.

<p style=”box-sizing: border-box; margin: 0px 0px 10px; caret-color: #3a3a3a; color: #3a3a3a; font-family: ‘Work Sans’, sans-serif; font-size: 20px;”>In its December 31 balance sheet, what amount should Acme report as accounts payable?”</p>
Answer:

<p style=”box-sizing: border-box; margin: 0px 0px 10px;”>The $50,000 debit balance in accounts payable for goods to be manufactured should be shown in accounts receivable unless right to set off exists. The goods shipped FOB destination should not be included as a liability until received and were not included in the $850,000 balance.</p>

<ul style=”box-sizing: border-box; margin-top: 0px; margin-bottom: 10px;”>
<li style=”box-sizing: border-box;”>$850,000 + 50,000 = $900,000

 

[KenLee]

I like to think about this way.

Dr. Payment to supplier $50,000

Cr. AP $850,000

Ending Balance AP: $800,000

This is what happed in the questions, which is incorrect.

CR. Payment to supplier $50,000

Cr. AP $850,000

Ending Balance AP: $900,000

This is what should happened.

The major difference is the $50,000 payment to a supplier should be debit or credit.

Since they mentioned Goods shipped F.O.B. destination, were received and recorded by Acme on January 2, we cannot reduced AP until January 2. After January 2, we can reduced the $50,000 payment to a supplier and reduced the total AP account.

Please let me know if you have any questions.

[Author]

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