[Anonymous]

I’m not sure whether we are permitted to ask these sorts of questions, but I am using Becker to study now, and I ran across this MCQ which, try as I might, I cannot understand. (The following question has been modified slightly, to avoid any potential copyright problem.)

Q. XYZ, Inc. is preparing its financial statements for the year ended December 31, Year 1. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following:

– At December 31, Year 1, XYZ has a $10,000 debit balance in its accounts payable to Rick, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to XYZ’s specifications.

– Checks in the amount of $50,000 were written to vendors and recorded on December 29, Year 1. The checks were mailed on January 5, Year 2.

What amount should XYZ report as accounts payable in its December 31, Year 1, balance sheet?

A. $430,000 (360,000 + 10,000 + 50,000)

I am confused about this answer. I thought that if you reversed out these amounts that were paid, that it would DECREASE accounts payable. Can anyone explain why the payments of these amounts would actually increase the accounts payable account?

(Also, since I am taking Becker’s Self-Study, I am unaware whether there is a way that we can ask specific content questions to Becker. If anyone knows that there is a way, I would really appreciate to know. Thanks!)

[excel monkey]

These amounts have already been included in (deducted from) the Accounts Payable balance. However, first you shouldn't have a debit balance for a vendor in accounts payable, so the 10,000 gets added back into A/P to bring the suppliers account to 0, and a prepaid asset is created for 10,000 because you have effectively prepaid your future liability. If you leave the 10K debit balance in the suppliers A/P, your overall A/P balance will be understated. Second, even though the checks were cut and recorded on 12/29, they weren't mailed until 1/5. At the end of the year XYZ still has control of the cash, so the amount of the checks should be included in Cash on the balance sheet, and A/P shouldn't have been reduced for the 50K until the checks were mailed, so it is added back as well.

Hope this helps

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[okcpa2015]

Anytime I get this type of question I recreate the journal entries, plug them into a T-Account and solve.

So the $10,000 is a prepayment and shouldn't be in A/P. Entry to Correct:

Dr. PPD – $10,000

Cr.A/P – $10,000

The checks were not mailed at the end of the period, so they should still be in the cash balance. To correct:

Dr. Cash – $50,000

Cr. A/P – $50,000

Just start writing out the Journal Entries and it will lead you to the correct answer, that simple.

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[Author]

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