Question

Question 4: Intercity Roofing manufactures and installs custom shingles for use on damaged roofs of residential houses and apartments. The company uses a specialized manufacturing process to ensure the replacement shingles are an exact match with the existing roof. The company uses a job order costing system to apply manufacturing overhead on the basis of direct labour cost. The company estimates that during the next year, it will incur $70,000 in overhead costs and will pay $140,000 in direct labour costs. During the year, the following transactions occurred: a) Purchased $180,000 of direct materials on account. b) Purchased $5,000 of supplies on account. (The supplies consisted of glue and cleaning supplies.) c) Requisitioned $170,000 of direct materials and $4,500 of supplies for use in production. d) Incurred employee costs: i. Direct labour $150,000 ii. Indirect labour 40,000 iii. Administrative salaries 190,000 iv. Sales salaries 30,000 v. Sales commissions 90,000 e) Advertised on local television: $5,000 f) Rent: $12,000. 40% of the space related to sales offices, 60% was a shop used in production of roofing materials. g) Depreciation: $25,000. 70% relates to roofing equipment, 30% relates to office equipment. h) Insurance expired: $15,000. 90% relates to the factory, the remainder relates to insurance on the office equipment. i) Manufacturing overhead costs were applied to production. j) Goods costing $375,000 were completed. k) The company had sales on account of $800,000. According to cost data, the jobs cost $350,000. Required: a) For items A through K above, record journal entries. Unless otherwise noted, assume all transactions were on account. b) Was overhead overapplied or underapplied for the period? By how much? c) Record a journal entry to close overhead to cost of goods sold. d) Based on the information above, prepare an income statement for the company - assume a 20% tax rate.

Answer 1

a.

Transaction	General Journal	Debit	Credit
		$	$
a.	Raw Materials Inventory	180,000
	Accounts Payable		180,000
b.	Supplies Inventory	5,000
	Accounts Payable		5,000
c.	Work in Process Inventory	170,000
	Manufacturing Overhead	4,500
	Raw Materials Inventory		170,000
	Supplies Inventory		4,500
d.	Work in Process Inventory	150,000
	Manufacturing Overhead	40,000
	Administrative Salaries Expense	190,000
	Sales Salaries Expense	30,000
	Sales Commission Expense	90,000
	Salaries and Wages Payable		500,000
e.	Advertising Expense	5,000
	Accounts Payable		5,000
f.	Manufacturing Overhead	7,200
	Rent Expense	4,800
	Accounts Payable		12,000
g.	Manufacturing Overhead	17,500
	Depreciation Expense	7,500
	Accumulated Depreciation		25,000
h.	Manufacturing Overhead	13,500
	Insurance Expense	1,500
	Prepaid Insurance		15,000
i.	Work in Process Inventory	75,000
	Manufacturing Overhead		75,000
j.	Finished Goods Inventory	375,000
	Work in Process Inventory		375,000
k.1	Accounts Receivable	800,000
	Sales Revenue		800,000
k. 2	Cost of Goods Sold	350,000
	Finished Goods Inventory		350,000

b. Overhead applied : $ 75,000

Overhead actually incurred : $ 82,700

Overhead underapplied = $ 82,700 - $ 75,000 = $ 7,700

c.

General Journal	Debit	Credit
Cost of Goods Sold	$ 7,700
Manufacturing Overhead		$ 7,700

d.

Intercity Roofing Income Statement For the year ended ......
Sales Revenue		$ 800,000
Less: Cost of Goods Sold		357,700
Gross Profit		442,300
Selling and Administrative Expenses
Advertising Expense	$ 5,000
Sales Salaries Expense	30,000
Sales Commission Expense	90,000
Rent Expense	4,800
Administrative Salaries Expense	190,000
Insurance Expense	1,500
Depreciation Expense	7,500
Total Selling and Administrative Expenses		328,800
Income before taxes		113,500
Income Tax Expense @ 20 %		22,700
Net Income		$ 90,800