Question

PART FOUR:

Waterways Ridgetown Inc. (WRI) was organized on January 1 of the current year. After five months of startup losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the income statement for August also showed a loss. August’s income statement follows:

Waterways Ridgetown Inc. Income Statement For the Month Ended August 31, 2019
Sales			$530,000
Less:	Operating Expenses
	Indirect Labour Cost	$9,000
	Utilities	25,000
	Direct Labour Cost	80,000
	Depreciation, Factory	21,000
	Raw Materials	226,000
	Depreciation	8,000
	Insurance	8,000
	Rent on Facilities	80,000
	Selling and Administrative	22,000
		65,000	$544,000
Net (Loss)			($14,000)

The company’s controller resigned a month ago. Sam, a new assistant in the controller’s office, prepared the income statement above. Sam has had little experience in manufacturing operations. After seeing the $14,000 loss for August, WRI’s president stated, “I was sure we’d be profitable within six months, but our six months are up and this loss for August is even worse than July’s. I think it’s time to start looking for someone to buy out the company’s assets—if we don’t, within a few months there won’t be any assets to sell. By the way, I don’t see any reason to look for a new controller. We’ll just limp along with Sam for the time being.”

Additional information about the company follows:

1. Some 50% of the utilities cost and 80% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities.
2. Inventory balances at the beginning and end of August were as follows:

	August 1	August 31
Raw Materials	$31,000	$78,000
Work in Process	18,000	10,000
Finished Goods	55,000	50,000

3. Only 75% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.

The president has asked you to check over the income statement and make a recommendation about whether the company should look for a buyer for its assets.

Required:

1. As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured in good form for August.
2. As a second step, prepare a new income statement for August.
3. Based on your statements prepared in parts (1) and (2), would you recommend that the company look for a buyer?

Answer 1

Answer with working is given below

Waterways Ridgetown Inc. Schedule of Cost of Goods Manufactured for the Month of August Opening inventory of Raw Material $31,000 Add: purchases $226,000 Total Direct Material Available $257,000 Less: Closing inventory of Raw Material $78,000 Raw material consumed $179,000 Direct Labor $80,000 PRIME COST $259,000 $9,000 Indirect labor Factory expenses Utilities Depreciation on Factory Insurance Rent on Facilities Total Factory cost of production Add: Opening work in progress $12,500 $21,000 $6,400 $60,000 $99,900 $367,900 $18,000 $385,900 $10,000 $375,900 Less: Closing work in progress Cost of Goods manufactured 2. Waterways Ridgetown Inc. Income Statement for the month of August Sales $530,000 Less: Cost of Goods Sold Opening Stock of Finished Goods Add: Cost of Goods manufactured $55,000 $375,900 $430,900 $50,000 Less: Closing Stock of Finished Goods Cost of Goods sold GROSS PROFIT $380,900 $149,100 Selling and administrative expenses Utilities Insurance Rent on Facilities Depreciation expense Other Selling and administrative expenses $12,500 $1,600 $20,000 $8,000 $87,000 $129,100 $20,000 Net Profit I 3. No Company need not look for Buyer as there is Profit in the month of August