Question

Problem 3-17 Cost Flows; T-Accounts; Income Statement [LO3-2, LO3-3, LO3-4]

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

Supreme Videos, Inc. Balance Sheet January 1
Assets
Current assets:
Cash				$	71,000
Accounts receivable					110,000
Inventories:
Raw materials (film, costumes)	$	38,000
Videos in process		30,000
Finished videos awaiting sale		89,000			157,000
Prepaid insurance					10,600
Total current assets					348,600
Studio and equipment		746,000
Less accumulated depreciation		218,000			528,000
Total assets				$	876,600
Liabilities and Stockholders' Equity
Accounts payable				$	170,600
Capital stock	$	428,000
Retained earnings		278,000			706,000
Total liabilities and stockholders' equity				$	876,600

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 is based on a cost formula that estimated $282,000 in manufacturing overhead for an estimated allocation base of 6,000 camera-hours. The following transactions occurred during the year:

1. Film, costumes, and similar raw materials purchased on account, $193,000.
2. Film, costumes, and other raw materials used in production, $208,000 (80% of this material was considered direct to the videos in production, and the other 20% was considered indirect).
3. Utility costs incurred on account in the production studio, $80,000.
4. Depreciation recorded on the studio, cameras, and other equipment, $92,000. Three-fourths of this depreciation related to production of the videos, and the remainder related to equipment used in marketing and administration.
5. Advertising expense incurred on account, $138,000.
6. Costs for salaries and wages were incurred on account as follows:

Direct labor (actors and directors)	$	90,000
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	118,000
Administrative salaries	$	103,000

7. Prepaid insurance expired during the year, $7,800 (75% related to production of videos, and 25% related to marketing and administrative activities).
8. Miscellaneous marketing and administrative expenses incurred on account, $9,400.
9. Studio (manufacturing) overhead was applied to videos in production. The company used 7,500 camera-hours during the year.
10. Videos that cost $558,000 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 $941,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $608,000.
12. Collections from customers during the year totaled $858,000.
13. Payments to suppliers on account during the year, $508,000; payments to employees for salaries and wages, $293,000.

Required:

1. Prepare a T-account for each account on the company’s balance sheet and enter the beginning balances.2. Record the transactions directly into the T-accounts. Key your entries to the letters (a) through (m) above.3. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year?4. Prepare a schedule of cost of goods manufactured.5. Prepare a schedule of cost of goods sold.6. Prepare an income statement for the year.

Complete this question by entering your answers in the tabs below.

Req 1 and 2: Prepare a T-account for each account on the company’s balance sheet and enter the beginning balances. Record the transactions directly into the T-accounts.

Req 3: Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year

Req 4: Prepare a schedule of cost of goods manufactured.

Req 5: Prepare a schedule of cost of goods sold.

Req 6: Prepare an income statement for the year.

Answer 1

Part 1 and 2

Cash

Bal.	71000	801000	(m)
(l)	858000
Bal.	128000

508000+293000= 801000

Accounts Receivable

Bal.	110000	858000	(l)
(k)	941000
Bal.	193000

Raw Materials

Bal.	38000	208000	(b)
(a)	193000
Bal.	23000

Prepaid Insurance

Bal.	10600	7800	(g)
Bal.	2800

Videos in Process

Bal.	30000	558000	(j)
(b)	166400
(f)	90000
(i)	352500
Bal.	80900

208000*80% = 166400

282000/6000*7500 =352500

Finished Goods

Bal.	89000	608000	(k)
(j)	558000
Bal.	39000

Studio and Equipment

Bal.	746000

Accumulated Depreciation

		218000	Bal.
		92000	(d)
		310000	Bal.

Studio Overhead

(b)	41600	352500	(i)
(c)	80000
(d)	69000
(f)	118000
(g)	5850
(n)	38050	38050	Bal.

208000*20% = 41600

92000*3/4 = 69000

7800*75% =5850

Depreciation Expense

(d)	23000

92000*1/4 =22750

Insurance Expense

(g)	1950

7800*25% =1950

Advertising Expense

(e)	138000

Miscellaneous Expense

(h)	9400

Administrative Salaries Expense               

(f)	103000

Sales     

		941000	(k)

Finished Goods

(k)	608000	38050	(n)
Bal.	569950

Accounts Payable

(m)	508000	170600	Bal.
		193000	(a)
		8000	(c)
		138000	(e)
		9400	(h)
		11000	Bal.

Salaries & Wages Payable

(m)	293000	311000	(f)
		18000	Bal.

90000+118000+103000= 311000

Capital Stock

		428000	Bal.

Retained Earnings

		278000	Bal.

Part 3

Overhead is overapplied for the year. The Entry (n) has been passed to record the closing of overapplied overhead balance to Cost of Goods Sold. Therefore,

Manufacturing overhead was overapplied by $38050 for the year

Part 4

Supreme Videos, Inc.

Schedule of Cost of Goods Manufactured

Direct Materials:
Beginning raw materials inventory	38000
Add: purchases of raw materials	193000
Total raw materials available	231000
Deduct: ending raw materials inventory	23000
Raw materials used in production	208000
Deduct: indirect materials included in manufacturing overhead	41600	166400
Direct labor		90000
Manufacturing overhead		314450
overapplied to work in process		38050
Total manufacturing costs		608900
Add: beginning work in process inventory		30000
		638900
Deduct: ending work in process inventory		80900
Cost of goods manufactured		$558000

Part 5

Supreme Videos Inc. Schedule of Cost of Goods Sold For the Year Ended December 31
Beginning finished videos inventory	89000
Cost of goods manufactured	558000
Cost of goods available for sale	647000
Less: Ending finished videos inventory	39000
Unadjusted cost of goods sold	$608000
Less: Overapplied overhead	38050
Adjusted cost of goods sold	$569950

Part 6

Supreme Videos Inc. Income Statement For the Year Ended December 31
Sales	941000
Cost of goods sold	569950
Gross margin	371050
Selling and administrative expenses	275350
Net operating income	$95700

23000+1950+138000+9400+103000 = 275350