Here is the entire problem from page 25 of the Ninja FAR book 2016:
Acme's Co's accounts payable balance at Dec 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 were shipped FOB 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?
$850,000
$895,000
$900,000
$945,000
C – 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.
$850,000 + 50,000 = $900,000
This problem has to do with the right of setoff, being able to offset receivables and payables with the same vendor with one another. Still, it gives the debit balance in the payable account as $50,000, and I know the normal balance of that account is the credit side. Still, the $50,000 was an advance payment to a company that makes custom parts for Acme, Inc. At the time, Acme paid this vendor: though Acme didn't owe them money, this was like an advance payment(?). I still don't understand why this amount should be in receivables.
Thanks
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