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				$	73,000
Accounts receivable					96,000
Inventories:
Raw materials (film, costumes)	$	33,000
Videos in process		47,000
Finished videos awaiting sale		78,000			158,000
Prepaid insurance					8,000
Studio and equipment (net)					530,000
Total assets				$	865,000
Liabilities and Stockholders’ Equity
Accounts payable				$	150,000
Retained earnings					715,000
Total liabilities and stockholders’ equity				$	865,000

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, $183,000.
2. Film, costumes, and other raw materials issued to production, $210,000 (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, $78,000.
4. Depreciation recorded on the studio, cameras, and other equipment, $82,000. 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), $131,000.
6. Salaries and wages paid in cash as follows:

Direct labor (actors and directors)	$	84,000
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	105,000
Administrative salaries	$	95,000

7. Prepaid insurance expired during the year, $7,000 (70% related to production of videos, and 30% related to marketing and administrative activities).

8. Miscellaneous marketing and administrative expenses incurred (on account), $9,600.

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 $565,000 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 $930,000 and were all on account.

12. The total cost to produce the videos that were sold according to their job cost sheets was $610,000.

13. Collections from customers during the year totaled $880,000.

14. Payments to suppliers on account during the year, $515,000.

15. Underapplied or overapplied overhead $__?__.

Required:

1. prepare a schedule of cost of goods sold for the year.

2. prepare an income statement for the year.

Answer 1