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Topic
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Lyle, 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, 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?
The explanation is
Unadjusted accounts payable at 12/31/Year 1 $ 360,000
Reverse debit balance and record as a prepaid (asset) 50,000
Reverse unmailed checks 100,000
Adjusted accounts payable at 12/31/Year 1 $ 510,000
My question is , why are we adding 50,000 and 100,000 to A/P? my answer was subtracting those, and my answer was 210,000.
Anyone can ring a bell?
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The $50K was properly recorded as a debit because it was a pre-payment for a special order.
The entry looked like this:
#2
A/P – Ross — Dr 50,000
Cash — Cr 50,000
It should have looked like this:
#3
Prepaid Asset (Special Order) — Dr. 50,000
Cash — Cr 50,000
You have to make an entry for the checks sitting in the vault because the cash has not constructively left your hands. Meaning, they can't cash them, if you don't mail them.
Don't forget to run your t-account for A/P to verify your answer. You will probably run into a problem like this somewhere else and they want to know the correct cash balance at the end of the period. T-Accounts are the best way to keep things straight.
Here is a screen shot of the T-accounts with explanations.
The $50K was properly recorded as a debit because it was a pre-payment for a special order.
The entry looked like this:
#2
A/P – Ross — Dr 50,000
Cash — Cr 50,000
It should have looked like this:
#3
Prepaid Asset (Special Order) — Dr. 50,000
Cash — Cr 50,000
You have to make an entry for the checks sitting in the vault because the cash has not constructively left your hands. Meaning, they can't cash them, if you don't mail them.
Don't forget to run your t-account for A/P to verify your answer. You will probably run into a problem like this somewhere else and they want to know the correct cash balance at the end of the period. T-Accounts are the best way to keep things straight.
Here is a screen shot of the T-accounts with explanations.
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