Question

Power Switch, Inc. designs and manufactures switches used in telecommunications. Serious flooding throughout North Carolina affected Power Switch's facilities. Inventory was completely ruined, and the company's computer system, including all accounting records, was destroyed Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory. He is standing in what is left of the accounting department with Paul Lopez, the cost accountant. "I didn't know mud could smell so bad," Paul says. "What should I be looking for?" "Don't worry about beginning inventory numbers," responds Stephen, "we'll get them from last year's annual report. We need first-quarter cost data. "I was working on the first-quarter results just before the storm hit," Paul says. "Look, my report is still in my desk drawer. All I can make out is that for the first quarter, direct material purchases were $476,000 and direct labor, manufacturing overhead, and total manufacturing costs to account for were $505,000, $245,000, and $1,425,000, respectively. Wait! Cost of goods available for sale was $1,340,000. "Great," says Stephen. "l remember that sales for the period were approximately $1,700,000 Given our gross profit of 30%, that's all you should need Paul is not sure about that but decides to see what he can do with this information. The beginning inventory numbers were Direct Materials, $113,000 Work-in-Process, $229,000 Finished Goods, $154,000 Requirements 1. Prepare a schedule showing each inventory account and the increases and decreases to each account. Use it to determine the ending inventories of Direct Materials, Work-in-Process, and Finished Goods 2. Itemize a list of the cost of inventory lost.

Answer 1

1) T-Accounts:
DEBIT	AMOUNT$	CREDIT	AMOUNT $
Direct Materials account :
OB	113000	WIP	446000
Purchases	476000	CB (Bal fig)	143000
Total	589000	Total	589000
Work In Process account :
OB	229000	Finished Goods	1186000
Direct Material (Bal fig)	446000	CB	239000
Direct Labor	505000
Manuf. overhead	245000
Total	1425000	Total	1425000
Finished Goods account :
OB	154000	COGS	1190000		1700000*(1-0.3)
WIP (Bal. fig)	1186000	CB	150000		(1340000 - 1190000)
Total	1340000	Total	1340000
2. ITEMIZED INVENTORY LOST:
	Amount $
Material Inventory	143000
Work in Process Inventory	239000
Finished Goods Inventory	150000
Total Inventory	532000