Question

Below is Salem Company’s income statement for 2018 that was prepared by an inexperienced accountant. Salem Company Income Statement As of December 31, 2018 Revenues: Sales revenue ……………..…………………………………… $298,000 Wages payable…………..……………………………………….. 4,000 Gain on sale of investment…………………………………….. 5,250 Deferred revenue………………………………………………. 2,500 Interest payable………………………………………………… 1,000 Accumulated depreciation……………………………………… 10,000 Total revenues ………………………………………………….. $320,750 Less operating expenses: Selling expenses….……………………… …………………. $32,250 Research and development expense………………….…….. 4,750 Prepaid advertising …….…………………………………. 3,000 Indirect manufacturing labor cost..………………………… 16,200 Utilities expense..…. .....................………………………… 10,200 Direct manufacturing labor cost. ………………………..… 41,000 Factory equipment………………………………………….. 40,000 Insurance expense…………………….………………. …… 3,500 Restructuring costs………………………………………….. 4,000 Direct materials purchased………………………………..... 93,000 Interest expense……………………………………………. 1,750 Rent expense…..…………….………………. …………….. 18,000 Other factory indirect costs…………………………………. 3,000 Dividend paid………………………………………………. 1,500 Administrative expenses………………….…………………. 40,400 Short-term investment……………………………………… . 19,000 Total operating expenses …………………………………….. 331,550 Net operating loss …………………………………………….. ($10,800) a. Seventy percent (70%) of utilities expense and 80% of insurance expense are for factory operations. Apply the remaining utilities and insurance expenses equally to selling expense and administrative expenses. b. Sixty percent (60%) of the rent expense is associated with factory operations. Allocate the remaining rent equally to selling expense and administrative expenses. c. Factory equipment was purchased January 1, 2017. It was estimated that the useful life of the equipment is 10 years and the residual value, $4,000. The $10,000 accumulated depreciation above is for 2017. No depreciation was charged for 2018. The company uses the double-declining balance method of depreciation. d. Inventory balances are: January 1, 2018 December 31, 2018 Direct materials……………… $5,000 $6,600 Work-in-process …………….. $8,000 $10,000 Finished goods ……………… $25,000 $28,000 e. The company’s tax rate is 21%. The president is disappointed with the results of operations and has asked you to review the income statement and make a recommendation as to whether the company should look for a buyer for its assets. Required: 1. As one step in gathering data for the president, prepare a corrected schedule of cost of goods manufactured for the year ended December 31, 2018. 2. As a second step, prepare a new multiple-step income statement for the year ended December 31, 2018. 3. Calculate the cost of producing one unit if the company produced 120,000 units in 2018 (round your answer to two decimal points).

Answer 1

Opening Inventory	5000
Purchases of Direct Material	93000
	98000
Less: Closing Direct Material	6600
Direct Material consumed during the period	91400
Direct Material used in the period	91400
Direct Labour	41000
Factory Overheads
Indirect manufacturing labor cost	16200
Utilities expenses	7140
Insurance expenses	2800
Rent expenses	10800
Other factory indirect costs	3000
Factory equipment depreciation	6000
Total Production Cost	178340
Total Production Cost	178340
+ Beginning Balance of WIP	8000
+ Ending Balance of WIP	10000
Cost of Goods Manufactured	176340
Opening Inventory of Finished Goods	25000
Add: Cost of Goods Manufaactued	176340
less: Closing Finished Goods	28000
Cost of goods sold	173340
Note 1
Calculation of Factory equipment depreciation
Cost of asset	40000
Residual Value	4000
Useful life	10 years
Accumulated Depreciation	10000
Annual Depreciation as per Double declining balane = Balance at the beginning of the period* Depreciation rate
Depreciate rate= two time the rate as per SLM = 2 * 10%= 20%
Depreciation = (40000-10000)*20%= 30000*20%= 6000

	Multi step Income Statement	Amount
	Sales Revenue	298,000.00
	Less: Cost of Goods Sold	173,340.00
	Gross Profit	124,660.00
	less: Selling, General and Administrative expenses
Note 2	Selling expenses	37,730.00
	Research n development expenses	4,750.00
Note 2	Administrative expenses	45,880.00
	Operating Income	36,300.00
	Add: Gain on sale of investment	5,250.00
	Less: Interest Expenses	1,750.00
	Less: Restructuring costs	4,000.00
	Income from continuing operations before income tax	35,800.00
	Income tax expense on continuing operations	7,518.00
	Income from continuing operations	28,282.00

below items which have not been entered anywhere will be going to balance sheet

Wages payable	Current Liability
deferred revenue	Current Liability
interest payable	Current Liability
Accumulated depr	Reduction from Non current assets
prepaid advertising	current assets
factory equipment	non current assets
Dividend paid	not a income statement item
Short-term investment	current assets

Total Production Cost	178,340.00
+ Beginning Balance of WIP	8,000.00
+ Ending Balance of WIP	10,000.00
Cost of Goods Manufactured	176,340.00
Units produced	120,000.00
Per unit cost of production	1.47

Note 2	Selling	Administration
Selling	32,250.00
Administration		40,400.00
Insurance 10% each -	1,530.00	1,530.00
Rent 20% each	3,600.00	3,600.00
Utility 15% each	350.00	350.00
Total	37,730.00	45,880.00