Issue and Rule Research - The process of finding and evaluating the law

Issues: From the Hydromaint, Inc. Jerry bumped into an expense on the income statement labeled other salaries. This expense had an original entry of debt on the salary expenses account and a credit to the cash account. The issue raised is the possibility of the company to set aside cash specifically for other salaries.

Maintenance Contracts is also another issue identified where the deferred asset was debited instead of an asset. The issue is there is nothing deferred asset because it is either the maintenance service is provided or not provided. Upon the expiration of the contract, the maintenance expense was debited and prepaid maintenance contract is credited.

The last issue is that Jerry paid for the wages payable but in the journal entries nothing was written down or providing any of the financial statements. The issue is after the wages payable were settled, they did not record in any of the journal entries.

Rules: According to FASB, while recognizing salaries in the financial statements, all nature of salaries are treated and recorded in this respective account. Therefore, other salary account does not exist. Further, the salaries are can be expensed as they occur or on an accrual basis and not adjusted as other salaries account. The rules cost centers are very clear that the expense balances from various activities will be deleted off of the general journal and all the activity incurred will be adjusted to the income statement. The major categories of wages are administrative and selling functions expenses which are expenses recorded on the income statement. Other salary expenses incurred by employees in the production process are included in the cost of goods sold. Therefore, to ascertain the recording of other salary account expenses, Jerry should trace the source of it from administration and selling or production. However, there will be significant changes in the gross and net profit of the company. The basic reason is that other salary had already been recognized and debited in the income statement and credit on the cash account in the balance sheet.

FASB requires that the wages payable to be recognized as a liability owed to the employees. These wages accumulate throughout the period until the employees are paid. In the income statement, they should be recognized as the accrued expense and wages payable at the time of reporting. Even though they have not been paid at the end of the period, they should be reported properly. When closing the financial period, Jerry should the following adjustments relating to the wages payable in the financial statements

Further, if the wages will be paid in February the subsequent year, the wages payable account would be debited and deduct the cash by crediting the cash account.

FASB codification requires the treatment of the maintenance contracts in the financial statements as balances under the accrual basis. Further, the conventional requirements of prudence concept are that where the net inflow of economic benefits from these contracts is probable, the revenue and cost should be recognized to the extent of contract completion. The journal entries show no amortization of maintenance contract cost which had been prepaid. The relevant adjustment for this correction should debt the prepaid cost and credit the cash. This would have been the initial journal entry at the end of the accounting period. Between the months February-December, the entries should be debit on maintenance expense with the amount that set for the months. Then, credit the prepaid cost for the maintenance contract to decrease the amortized amount. This adjustment accounts for the period that the contract cost has technically been used.

Analysis: Wages payable is a liability account that reports the amounts owed to employees. It is often used at the end of a financial period. In most organizations, December 31 marks the end of a financial period but not the end of a payroll period. This means that the wages will be paid in the next financial period. The amount is credited in wages payable account while the wages expense account is debited. This end year adjustment closes the wages expense account. In January, Jerry paid his employees and failed to do the relevant postings. To correct the error, the wages payable account is debited because Jerry no longer owes his employees and cash account is credited to reflect cash paid to employees. The correct journal entry is shown below:

Hydromaint Inc. included other salaries account in their books yet it does not exist. The journal entry done by Jerry should be canceled. The salary expense account should be credited because it was credited by Jerry in the original entry while cash account should be debited because in the original entry it was credited. The journal entry is as shown below:

Maintenance contract posting was done incorrectly. Since maintenance contract cost had been prepaid, every month the maintenance contract expense account should have been debited by the amortized amount while prepaid cost maintenance contract credited. At the end of the financial period, the prepaid cost maintenance contract should have been debited and cash account credited. This end year adjustment is done to close prepaid cost maintenance contract. The correct journal entry is shown below:

Conclusion: Hydromaint Inc. journal entries corrections has resulted to changes in the company’s financial statements. Initially, wage expenses had been omitted from the income statement but after corrections wage expenses had been added to the income statement. The balance sheet of the company also changed, the cash amount of the company decreased to reflect the cash Jerry paid his employees.

The correct journal entries for Maintenance contract increased the assets amount and reduced cash amount changing the balance sheet balances of the company.

Other salaries expenses was excluded from the income statement because it does not exist. Therefore, total expenses of Hydromaint Inc. decreased resulting to increased gross and net profit of the company.