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				$	90,800
Accounts receivable					104,200
Inventories:
Raw materials (film, costumes)	$	26,400
Videos in process		51,000
Finished videos awaiting sale		87,800			165,200
Prepaid insurance					8,550
Studio and equipment (net)					568,000
Total assets				$	936,750
Liabilities and Stockholders’ Equity
Accounts payable				$	244,000
Retained earnings					692,750
Total liabilities and stockholders’ equity				$	936,750

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, $214,000.
2. Film, costumes, and other raw materials issued to production, $230,000 (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, $91,800.
4. Depreciation recorded on the studio, cameras, and other equipment, $96,400. 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), $149,000.
6. Salaries and wages paid in cash as follows:

Direct labor (actors and directors)	$	90,400
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	83,500
Administrative salaries	$	113,200

1. Prepaid insurance expired during the year, $7,800 (70% related to production of videos, and 30% related to marketing and administrative activities).
2. Miscellaneous marketing and administrative expenses incurred (on account), $9,900.
3. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.
4. Videos that cost $552,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
5. Sales for the year totaled $1,110,000 and were all on account.
6. The total cost to produce the videos that were sold according to their job cost sheets was $596,090.
7. Collections from customers during the year totaled $1,060,000.
8. Payments to suppliers on account during the year, $610,000.
9. Underapplied or overapplied overhead $__?__.

Required:

1. Prepare a transaction analysis that records all of the above transactions.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

Answer 1

1.

	Star Videos, Inc.
	Transaction Analysis
	For the Year Ended December 31
		Cash	Accounts Receivable	Raw Materials	Videos in Process	Finished Videos	Manufacturing Overhead	Prepaid Insurance	Studio & Equipment (net)	=	Accounts Payable	Retained Earnings
	Beginning balance @ 1/1	90800	104200	26400	51000	87800	0	8550	568000	=	244000	692750
a)	Raw material purchases			214000						=	214000
b)	Raw materials used			-230000	195500		34500			=
c)	Utility costs						91800			=	91800
d)	Depreciation charges						72300		-96400	=		-24100
e)	Advertising									=	149000	-149000
f)	Salaries & wages	-287100			90400		83500			=		-113200
g)	Prepaid insurance						5460	-7800		=		-2340
h)	Miscellaneous marketing									=	9900	-9900
i)	Applied overhead				290000		-290000			=
j)	Transfer completed videos to finished goods				-552000	552000				=
k)	Sales		1110000							=		1110000
l)	Transfer finished goods to cost of goods sold					-596090				=		-596090
m)	Cash collections from customers	1060000	-1060000							=
n)	Payment to suppliers	-610000								=	-610000
o)	Overapplied overhead						2440			=		2440
	Ending balances @12/31	253700	154200	10400	74900	43710	0	750	471600	=	98700	910560

2.

Star Videos, Inc.
Schedule of Cost of Goods Manufactured
For the Year Ended December 31
Beginning raw materials inventory $	26400
Add: Raw material purchases	214000
Raw materials available for use	240400
Less: Ending raw materials inventory	10400
Raw materials used	230000
Less: Indirect materials	34500	195500
Direct labor		90400
Manufacturing overhead		290000
Total manufacturing costs		575900
Add: Beginning videos in process inventory		51000
Total videos in process inventory		626900
Less: Ending videos in process inventory		74900
Cost of goods manufactured		552000

3.

Star Videos, Inc.
Schedule of Cost of Goods Sold
For the Year Ended December 31
Cost of goods manufactured	552000
Add: Beginning finished goods inventory	87800
Cost of goods available for sale	639800
Less: Ending finished goods inventory	43710
Cost of goods sold	596090
Less: Overapplied overhead	2440
Adjusted cost of goods sold $	593650

4.

Star Videos, Inc.
Income Statement
For the Year Ended December 31
Sales revenue	1110000
Cost of goods sold	593650
Gross profit	516350
Operating expenses	298540
Net income $	217810