- This topic has 1 reply, 2 voices, and was last updated 9 years, 1 month ago by
.
-
Topic
-
Lyle, Inc. is preparing its financial statements for the year ended December 31, Year 2. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following:
At December 31, Year 2, 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, Year 1. The checks were mailed on January 5, Year 2.
What amount should Lyle report as accounts payable in its December 31, Year 1, balance sheet?
a. $510,000
b. $410,000
c. $310,000
d. $210,000
The answer is (a) and the explanation is
The $50,000 should be reclassified as a current asset; Advance to Suppliers.
$100,000 reduction should not have been recorded until until checks were mailed; so reverse this.
Thus $360,000 + $50,000 + $100,000 = $510,000
I understand the $100,000 part.
What I do not understand is the $50,000 part. So there’s a debit balance in the A/P account for Ross. Since it turned out to be a debit balance, then $50,000 credits of account’s payable to Ross never existed.
So why would we credit back $50,000 to accounts payable to increase it? This must be because Lyle Inc. just debited $50,000 of account’s payable without checking whether or not accounts payable for that specific transaction exists? So is this really how it works in the real world? And from now on whenever there is a debit balance in accounts payable to some random account, do we assume it’s a mistake?
I’m trying to get the bigger picture here so I can tackle these problems from any perspective.
FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016
- You must be logged in to reply to this topic.
