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yukagin
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| Posted: 06 Feb 2011 at 06:08 | IP Logged
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maybe im being dumb but there's something im not getting
here. why do they increase A/P just because he wrote a
check that didnt go out until the next year?
Black Corp.'s accounts payable at December 31 Year 1,
totaled $900,000 before any necessary year-end
adjustments relating to the following transactions:
On December 27, Year 1, Black wrote and recorded checks
to creditors totaling $400,000 causing an overdraft of
$100,000 in Black's bank account at December 31, Year 1.
The checks were mailed out on January 10, Year 2.
On December 28, Year 1, Black purchased and received
goods for $153,061, terms 2/10, n/30. Black records
purchases and accounts payable at net amounts. The
invoice was recorded and paid January 3, Year 2.
Goods shipped F.O.B. destination on December 20, Year 1
from a vendor to Black were received January 2, Year 2.
The invoice cost was $65,000. At December 31, Year 1,
what amount should Black report as total accounts
payable?
a.$1,515,000
b.$1,450,000
c.$1,153,061
d.$1,053,061
Explanation
Choice "b" is correct. $1,450,000 accounts payable at
12/31/Year 1.
Accounts Payable Balance per books before y/e
adjustments$900,000
Add: Checks written on 12/27/Year 1 (which educed A/P)
but not mailed until 1/10/Year 2
400,000
Add: Goods received 12/28/Year 1 but not recorded until
1/3/Year 2 at amount net of 2% discount ($153,061 x
98%)150,000 No entry for goods shipped FOB destination on
12/20/Year 1 but not received until 1/2/Year 20 Total
accounts payable at 12/31/Year 1$1,450,000
__________________
REG82,BEC79,FAR 5/31/11 (waiting)
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KIJ2011
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| Posted: 06 Feb 2011 at 07:45 | IP Logged
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I believe it's because of accrual accounting. Black wrote and recorded the checks, so they would be in his books at year-end, regardless of the late mailing.
What I don't get is how there is an overdraft in Black's bank account at December 31, Year 1 if he didn't mail the checks until January 10, Year 2. Can someone explain?
__________________
FAR: 4/20
REG: 4/21
AUD: 4/22
BEC: 4/19
Montana (NASBA)
Wish me luck.
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MAII
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| Posted: 06 Feb 2011 at 10:24 | IP Logged
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For Accrual base accounting, you recognized revenue and expenses as they are earned or incurred, not when received. So the checks written to creditors in December 27 were for expenses incurred in December.
There are some cases where companies don't reconcile their bank accounts and the ending balance in their bank account is more than it actual is. So, the checks that were written and cleared the bank causes an overdraft. But I think in this questions, an overdraft refers to a negative balance on the bank account.
Please correct me if i'm wrong.
__________________
REG - 80
FAR - 72. 2/19/11 -
BEC -
AUD -
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KIJ2011
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| Posted: 07 Feb 2011 at 07:10 | IP Logged
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Since the checks weren't sent until Year 2, how does an overdraft happen in Year 1? That was my question.
__________________
FAR: 4/20
REG: 4/21
AUD: 4/22
BEC: 4/19
Montana (NASBA)
Wish me luck.
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MAII
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| Posted: 07 Feb 2011 at 10:46 | IP Logged
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For accrual basis you have the record the checks when you write them. So, when they were written and recorded on December 27th, it caused the balance to be overdraft, which means a negative balance.
__________________
REG - 80
FAR - 72. 2/19/11 -
BEC -
AUD -
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Topic: F4 why an increase to A/P?
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