General Motors has always shut down for one week at the end of December for routine maintenance of the company’s equipment. The annual maintenance is essential to ensure that it's equipment can meet the precise specifications of customers. For the past three years, maintenance has been completed by the end of December. The annual maintenance originally scheduled for Dec 2018 was delayed until the first week of January 2019 because of scheduling problems with the company that does the maintenance and because it had a number of contracts it wanted to complete by the end of December. The last maintenance was done in December 2017. General Motors paid $500,000 for the January 2019 maintenance work which was paid in mid-January.
Please help me figure out what is wrong in this scenario and/or how I would have to account for this in the books for the fiscal year-end 2018. Thank you.
In this scenario, there are a few issues that need to be addressed in the accounting books for the fiscal year-end 2018.
1. Delayed Maintenance: The annual maintenance that was originally scheduled for December 2018 was delayed until January 2019. Since the maintenance was not performed in the intended fiscal year, you need to account for this delay and its financial impact.
2. Payment Timing: The payment for the January 2019 maintenance work was made in mid-January. As this payment was made after the fiscal year-end, you need to appropriately account for it in the fiscal year-end 2018.
To address these issues, here's how you should account for them:
1. Delayed Maintenance: Since the maintenance was delayed and not performed in December 2018, you should adjust the maintenance expense for the fiscal year-end 2018. This adjustment will involve recognizing the amount that would have been paid for the maintenance in the fiscal year-end. This adjustment will likely be reducing the expense for maintenance in fiscal year-end 2018 and increasing the payable for the maintenance work.
2. Payment Timing: The payment for the January 2019 maintenance work was made after the fiscal year-end, so it should not be included in the expenses for fiscal year-end 2018. Instead, you need to record the payment as a payable in the fiscal year-end 2018.
To summarize, the adjustments in the books for the fiscal year-end 2018 would involve reducing the maintenance expense and increasing the payable for the delayed maintenance that occurred in January 2019. Additionally, you need to record the payment made for the January 2019 maintenance as a payable in the fiscal year-end 2018.
In this scenario, there are a few aspects that need to be addressed in the books for the fiscal year-end 2018:
1. Delayed Maintenance: The annual maintenance that was originally scheduled for December 2018 was delayed and completed in January 2019. This means that the costs associated with this maintenance should be accounted for in the next fiscal year (2019) and not in the fiscal year-end 2018.
2. Accruals: Since the maintenance work was completed in January 2019, General Motors should record an accrual entry at the end of the fiscal year 2018 to account for the expenses incurred for the maintenance work that will be paid in the next fiscal year. The exact amount of the accrual entry can be determined based on the agreed upon cost of the maintenance work.
3. Accounts Payable: Once the maintenance work is completed in January 2019, General Motors should record the actual expense in the books and create an accounts payable entry to represent the amount owed to the company performing the maintenance, which in this case is $500,000.
To summarize, in the books for the fiscal year-end 2018, General Motors should record an accrual entry to account for the expenses of the delayed maintenance work, and once the maintenance work is completed in January 2019, the actual expense should be recorded along with an accounts payable entry.