Question

Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales. The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $330,000 of manufacturing overhead for an estimated activity level of $200,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows: Raw materials Work in process Finished goods $ 25,000 $ 10,000 $ 40,000 During the year, the following transactions were completed: a. Raw materials purchased on account, $275,000. b. Raw materials used in production, $280,000 (materials costing $220,000 were charged directly to jobs; the remaining materials were indirect). c. Costs for employee services were incurred as follows: Direct labor Indirect labor Sales commissions Administrative salaries $ 180,000 $ 72,000 $ 63,000 $ 90,000 d. Rent for the year was $18,000 ($13,000 of this amount related to factory operations, and the remainder related to selling and administrative activities). e. Utility costs incurred in the factory, $57,000. f. Advertising costs incurred, $140,000 g. Depreciation recorded on equipment, $100,000. ($88,000 of this amount related to equipment used in factory operations, the remaining $12,000 related to equipment used in selling and administrative activities.) h. Record the manufacturing overhead cost applied to jobs. i. Goods that had cost $675,000 to manufacture according to their job cost sheets were completed j. Sales for the year (all paid in cash) totaled $1,250,000. The total cost to manufacture these goods according to their job cost sheets was $700,000. Required: 1. Prepare journal entries to record the transactions for the year. 2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don't forget to enter the beginning balances in your inventory accounts). 3A. Is Manufacturing Overhead underapplied or overapplied for the year? 3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. 4. Prepare an income statement for the year. (All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.) Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Req ЗА Req 3B Reg 4 Prepare an income statement for the year. (All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.) Gold Nest Company Income Statement

Answer 1

journal entries

S.no	particular	Debit ($)	credit ($)
1	Raw material inventory	275000
	Accounts payable		275000
2	work in process	220000
	Manufacturing OVERHEAD	60000
	RAW MATERIAL inventory		280000
3	work in process	180000
	Manufacturing OVERHEAD	72000
	Sales commission	63000
	Administrative salaries	90000
	Wages payable		405000
4	Manufacturing OVERHEAD	13000
	Rental expenses	5000
	Rental payable		18000
5	Manufacturing OVERHEAD	57000
	Accounts payable		57000
6	advertising expenses	140000
	Accounts payable		140000
7	Manufacturing OVERHEAD	88000
	Depreciation	12000
	Accumulated depreciation		100000
8	work in process (note below)	297000
	Manufacturing OVERHEAD		297000
9	finished goods	675000
	Work in process		675000
10	accounts receivable	1250000
	Sales		1250000
11	cost of goods sold	700000
	Finished goods		700000

note: pre determined OVERHEAD rate =$330000/$200000

=1.65

Appiled overhead = $180000×$1.65 = $297000

T accounts

RAW MATERIAL inventory

Beginning balance	25000	work in process	220000
Accounts payable	275000	Manufacturing OVERHEAD	60000
		Balance	20000

Work in process

Beginning balance	10000	finished goods	675000
RAW MATERIAL inventory	220000
Wages payable	180000	balance	32000
Manufacturing OVERHEAD	297000

  Manufacturing OVERHEAD

RAW MATERIAL inventory	60000	work in process	297000
Wages payable	72000
Rental payable	13000
Accounts payable	57000
Accumulated depreciation	88000
Balance (overapplied)	7000

Finished goods

Beginning balance	40000	cost of goods sold	700000
Work in process	675000	BALANCE	15000

  

cost of goods sold

Finished goods	700000	Manufacturing OVERHEAD (overapplied)	7000
		Balance	693000

3)a manufacturing overhead overapplied =$290000- $297000= $7000

3b)

Manufacturing OVERHEAD (overapplied)	7000
Cost of goods sold		7000

4) . INCOME STATEMENT

Particular	amount ($)
Sales	1250000
(-) cost of goods sold	(693000)
Gross margin	557000
(-) expenses
Sales commission	(63000)
Administrative salaries	(90000)
Rental expenses	(5000)
Advertising	(140000)
Depreciation	(12000)
Net operating income	247000

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