Question

ETech Company was organized on January 1, 2017 to produce and sell a revolutionary smart watch. At the beginning of its second year (2018) finished goods inventory was 2,000 watches. During 2018 ETech accountant resigned and the accounting was done by an accounting student who worked part-time for the company. The income statement below was prepared by the accounting student.

ETech Company

Income Statement

As of December 31, 2018

Revenues:

   Sales revenue (38,000 watches)……………………………….                       $1,140,000

   Royalty revenue……………………………………………….                                     500

   Gain on sale of trading investment……………………………                                 7,000

   Deferred rent revenue …………..……………………………                                3,500

   Interest payable………………………………………………...                                 3,700

Total revenues …………………………………………………..                        $1,154,700

Operating expenses:

    Cost of goods manufactured. ..………………………………    $1,113,000    

    Selling and distribution expense………………………..……        195,000

    General and administrative expense…………………………           95,000

    Restructuring costs………………………………………….            25,000

    Short-term investments………………………………………           17,000

    Interest expense………………. ……………………………..           5,000

    Dividend paid………………………………………………..             1,000

Total operating expenses ………………………………………                           1,451,000

Net loss …………………………………………………………                          ($296,300)    

  

ETech Company

                         Schedule of Cost of Goods Manufactured

                                      As of December 31, 2018

    Purchase of direct materials…………………………………….                           360,000

    Direct manufacturing labor costs ………………………………                             79,000

    Indirect Manufacturing Overhead:

       Factory maintenance.…..…….………………………………       $35,000

       Factory insurance …. ………………………………………..           3,000
       Indirect manufacturing labor costs.…………………………..       105,000

       Rent expense …………………………………………………        84,000

       Utilities expense ………………………………………………      30,000

       Research & development expense…………………………...         15,000

       Prepaid factory insurance…………………………………….          2,000

       Factory equipment …………………………………………...       500,000

       Accumulated depreciation - factory equipment ……………….   (100,000)

   Total indirect manufacturing overhead…………………………                            674,000

    Cost of goods manufactured …………………………………..                        $1,113,000

   

Additional information about the company’s activities during the year is as follows:

     a. In 2018 the company produced 40,000 watches.

     b. Inventories at the beginning and end of the year were as follows:

                                                                  January1, 2018      December 31, 2018

            Direct materials………………          $8,000                       $10,000

            Work in process ……………..       $25,200                         49,000

             Finished goods ………………         $37,800                              ?

c. Seventy five percent (75%) of rent expense relates to manufacturing, 15% to general and administrative expense and 10% to selling and distribution expense.

Also, 90% of utilities expense relates to manufacturing, 6% to general and administrative expense and 4% to selling and distribution expense.

d. Factory equipment was purchased January 2, 2017 and is estimated to have a useful life of 10 years with a $5,000 salvage value remaining at the end of its useful life. The company uses the double-declining-balance method of depreciation. The accumulated depreciation of $100,000 reported in the Schedule of Cost of Goods Manufactured resulted from 2017 factory equipment depreciation. No depreciation was charged for 2018.

e. The company’s tax rate is 21 %.

The company’s CEO is concerned about the large net loss and hires your accounting firm to review the above financial statements.

Required:

1. Prepare a corrected Schedule of Cost of Goods Manufactured for the year ended December 31, 2018.
2. Calculate the cost of producing one watch (show calculation)
3. Prepare a revised multiple-step income statement for the year ended December 31, 2018.

Answer 1

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Part 1
Direct materials costs
-Beginning inventory		$    8,000
- Purchases of direct materials		$360,000
-Cost of direct materials available for use		$368,000
Ending inventory		$ -10,000
Direct Material Used			$ 358,000
Direct manufacturing labor costs			$   79,000
Indirect manufacturing Overhead Cost:
-Factory Maintenance		$ 35,000
-Factory Insurance		$    3,000
-Indirect Manufacturing Labor Cost		$105,000
-Rent Expense ($84,000*75%)		$ 63,000
-Utility Expense ($30,000*90%)		$ 27,000
-Depreciation Expense		$100,000	$ 333,000
Manufacturing costs incurred			$ 770,000
Add beginning work-in-process inventory			$   25,200
Total manufacturing costs to account for			$ 795,200
Less Ending WIP			$ -49,000
Cost of Goods Manufactured			$ 746,200
Part 2
Cost of Goods Manufactured			$ 746,200
No of Units Produced			40,000
Per Unit Cost			$     18.66
Part 3
Sales Revenue					$1,140,000
Less: Cost of Goods Sold
Beginning Finished Goods				$     37,800
Add: Cost of Goods Manufactured				$   746,200
Cost of goods available for sale				$   784,000
less: Ending Finished Goods	784000-709080			$    -74,920
Cost of Goods Sold	$18.66*38,000 Units				$ -709,080
Gross Profit					$   430,920
Less: Operating Expense
Selling and Distribution Expense
Selling and Distribution Expense			$ 195,000
Rent Expense	$84,000*10%		$     8,400
Utility Expense	$30,000*4%		$     1,200
Total Selling and Distribution Expense				$   204,600
General and Administration Expense
General and Administration Expense			$   95,000
Restructuring Cost			$   25,000
Rent Expense	$84,000*15%		$   12,600
Utility Expense	$30,000*6%		$     1,800
Research and Dev Cost			$   15,000
Total General and Administration Expense				$   149,400
Total Operating Expense					$ -354,000
Operating Income					$     76,920
Other Gain/Losses:
Royalty Revenue				$           500
Gain on sale of Investment				$        7,000
Interest Expense				$      -5,000
Total Other gain and Losses					$        2,500
Income Before tax					$     79,420
Less: Income Tax 21%					$    -16,678
Net Income					$     62,742