Question

Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below.

Star Videos, Inc.
Balance Sheet
January 1
Assets
Cash				$	81,800
Accounts receivable					104,400
Inventories:
Raw materials (film, costumes)	$	17,200
Videos in process		57,400
Finished videos awaiting sale		85,800			160,400
Prepaid insurance					12,650
Studio and equipment (net)					588,000
Total assets				$	947,250
Liabilities and Stockholders’ Equity
Accounts payable				$	203,000
Retained earnings					744,250
Total liabilities and stockholders’ equity				$	947,250

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year:

1. Film, costumes, and similar raw materials purchased on account, $195,500.
2. Film, costumes, and other raw materials issued to production, $209,500 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).
3. Utility costs incurred (on account) in the production studio, $85,800.
4. Depreciation recorded on the studio, cameras, and other equipment, $106,000. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.
5. Advertising expense incurred (on account), $175,000.
6. Salaries and wages paid in cash as follows:

Direct labor (actors and directors)	$	89,200
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	82,500
Administrative salaries	$	112,800

7. Prepaid insurance expired during the year, $9,950 (70% related to production of videos, and 30% related to marketing and administrative activities).
8. Miscellaneous marketing and administrative expenses incurred (on account), $10,350.
9. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.
10. Videos that cost $566,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
11. Sales for the year totaled $1,000,000 and were all on account.
12. The total cost to produce the videos that were sold according to their job cost sheets was $611,070.
13. Collections from customers during the year totaled $950,000.
14. Payments to suppliers on account during the year, $556,000.
15. Underapplied or overapplied overhead $__?__.

Required:

1. Prepare a transaction analysis that records all of the above transactions. Calculate the ending balances at December 31 for all balance sheet accounts.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

Answer 1

Part 1

Star Videos Inc. Transaction Analysis For the Year Ended December 31
	Cash	Accounts receivable	Ra materials	Videos in process	Finished goods	Manufacturing overhead	Prepaid expenses	Studio & equipment (net)	=	Accounts payable	Retained earnings
Beginning balance @1/1	81800	104400	17200	57400	85800		12650	588000		203000	744250
(a) Raw material purchase			195500							195500
(b) Raw materials used			(209500)	178075		31425
(c)Utility costs						85800				85800
(d) Depreciation charges						79500		(106000)			(26500)
(e) Advertising										175000	(175000)
(f)Salaries & wages	(284500)			89200		82500					(112800)
(g) Prepaid insurance						6965	(9950)				(2985)
(h) Miscellaneous marketing										10350	(10350)
(i)Applied overhead				290000		(290000)
(j)Transfer completed videos to finished goods				(566000)	566000
(k)Sales		1000000									1000000
(l)Transfer finished goods to cost of goods sold					(611070)						(611070)
(m) Cash collections from customers	950000	(950000)
(n) Payment to suppliers	(556000)									(556000)
(o) Overapplied overhead						3810					3810
Ending balances @ 12/31	191300	154400	3200	48675	40730	0	2700	482000		113650	809355

209500*85% = 178075

209500*15% = 31425

106000*3/4 = 79500

106000*1/4 = 26500

9950*30% = 2985

9950*70% = 6965

280000/7000*7250 = 290000

Part 2

Star Videos Inc. Schedule of Cost of Goods Manufactured For the Year Ended December 31
Direct Materials:
Beginning raw materials inventory	17200
Add: purchases of raw materials	195500
Total raw materials available	212700
Deduct: ending raw materials inventory	3200
Raw materials used in production	209500
Deduct: indirect materials included in manufacturing overhead	31425	178075
Direct labor		89200
Manufacturing overhead		286190
overapplied overhead to work in process		3810
Total manufacturing costs		557275
Add: beginning work in process inventory		57400
		614675
Deduct: ending work in process inventory		48675
Cost of goods manufactured		$566000

Part 3

Star Videos Inc. Schedule of Cost of Goods Sold For the Year Ended December 31
Beginning finished videos inventory	85800
Cost of goods manufactured	566000
Cost of goods available for sale	651800
Less: Ending finished videos inventory	40730
Unadjusted cost of goods sold	$611070
Less: Overapplied overhead	3810
Adjusted cost of goods sold	$607260

Part 4

Star Videos Inc. Income Statement For the Year Ended December 31
Sales	1000000
Cost of goods sold	607260
Gross margin	392740
Selling and administrative expenses	327635
Net operating income	$65105