Question

Problem 3-15 Journal Entries; T-Accounts; Financial Statements [LO3-1, LO3-2, LO3-3, LO3-4]

Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a cost formula that estimated $380,000 of manufacturing overhead for an estimated allocation base of 1,000 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $220,000.
2. Raw materials used in production (all direct materials), $205,000.
3. Utility bills incurred on account, $63,000 (90% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,075 hours)	$	250,000
Indirect labor	$	94,000
Selling and administrative salaries	$	130,000

5. Maintenance costs incurred on account in the factory, $58,000
6. Advertising costs incurred on account, $140,000.
7. Depreciation was recorded for the year, $88,000 (85% related to factory equipment, and the remainder related to selling and administrative equipment).
8. Rental cost incurred on account, $113,000 (90% related to factory facilities, and the remainder related to selling and administrative facilities).
9. Manufacturing overhead cost was applied to jobs, $ ? .
10. Cost of goods manufactured for the year, $810,000.
11. Sales for the year (all on account) totaled $1,400,000. These goods cost $840,000 according to their job cost sheets.

The balances in the inventory accounts at the beginning of the year were:

Raw Materials	$	34,000
Work in Process	$	25,000
Finished Goods	$	64,000

Required:

1. Prepare journal entries to record the preceding transactions.

2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)

3. Prepare a schedule of cost of goods manufactured.

4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4B. Prepare a schedule of cost of goods sold.

5. Prepare an income statement for the year.

Answer 1

journal entries

S.no	particular	DEBIT ($)	CREDIT ($)
1	RAW MATERIAL INVENTORY	220000
	Accounts payable		220000
2	work in process	205000
	RAW MATERIAL inventory		205000
3	Manufacturing OVERHEAD	56700
	Utility expenses	6300
	Utility payable		63000
4	work in process	250000
	Manufacturing OVERHEAD	94000
	Selling and administrative salaries	130000
	Wages payable		474000
5	Manufacturing OVERHEAD	58000
	Account payable		58000
6	advertising expenses	140000
	Accounts payable		140000
7	Manufacturing OVERHEAD	74800
	Depreciation	13200
	Accumulated depreciation		88000
8	Manufacturing OVERHEAD	101700
	Rental expenses	11300
	Rental payable		113000
9	work in process (note below)	408500
	Manufacturing OVERHEAD		408500
10	finished goods	810000
	Work in process		810000
11	accounts receivable	1400000
	Sales		1400000

12	cost of goods sold.	840000
	Finished goods		840000

note: PRE DETERMINED OVERHEAD rate=$380000/1000= 380per direct labour hour

= 1075hrs × $380= $408500

2). T ACCOUNTS

RAW MATERIAL INVENTORY

Beginning balance	34000	work in process	205000
Accounts payable	220000	balance	49000

work in process

Beginning balance	25000	finished goods	810000
Raw material inventory	205000
Wages payable	250000	balance	78500
Manufacturing OVERHEAD	408500

Finished goods

Beginning balance	64000	cost of goods sold	840000
Work in process	810000	balance	34000

Manufacturing OVERHEAD

Utility payable	56700	work in process	408500
Wages payable	94000
Accounts payable	58000
Accumulated depreciation	74800
Rental payable	101700
Balance (overapplied)	23300

3) SCHEDULE OF COST OF GOODS MANUFACTURED

Particular	amount ($)
Direct material	205000
Direct labour	250000
Manufacturing OVERHEAD	408500
Total Manufacturing cost	863500
+ Beginning work in process	25000
(-) ending work in process	(78500)
cost of goods manufactured	810000

4a)

4a)	Manufacturing OVERHEAD	23300
	Cost of goods sold		23300

4b) SCHEDULE OF COST OF GOODS SOLD

Particular	amount ($)
Beginning finished goods	64000
Cost of goods manufactured	810000
Cost of goods available for sale	874000
(-) endings finished goods	(34000)
Unadjusted cost of goods sold	840000
(-) overapplied overhead	(23300)
COST OF GOODS SOLD	816700

5). Income statement

Particular	amount ($)
Sales	1400000
(-) cost of goods sold	(816700)
Gross profit	583300
(-) expenses
Utility expenses	(6300)
Salaries and administrative	(130000)
Advertising expenses	(140000)
Depreciation	(13200)
Rental expenses	(11300)
NET OPERATING INCOME	282500

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