Question

Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales. All of the company’s transactions with customers, employees, and suppliers are conducted in cash; there is no credit. The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $126,000 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows: Raw materials $ 10,900 Work in process $ 4,900 Finished goods $ 8,000 During the year, the following transactions were completed: a. Raw materials purchased for cash, $166,000. b. Raw materials requisitioned for use in production, $143,000 (materials costing $129,000 were charged directly to jobs; the remaining materials were indirect). c. Costs for employee services were incurred as follows: Direct labor $ 179,000 Indirect labor $ 461,300 Sales commissions $ 22,000 Administrative salaries $ 46,000 d. Rent for the year was $18,400 ($13,800 of this amount related to factory operations, and the remainder related to selling and administrative activities). e. Utility costs incurred in the factory, $11,000. f. Advertising costs incurred, $14,000. g. Depreciation recorded on equipment, $23,000. ($15,000 of this amount was on equipment used in factory operations; the remaining $8,000 was on equipment used in selling and administrative activities.) h. Manufacturing overhead cost was applied to jobs, $? i. Goods that had cost $228,000 to manufacture according to their job cost sheets were completed. j. Sales for the year totaled $503,000. The total cost to manufacture these goods according to their job cost sheets was $216,000.

Required: 1. Prepare journal entries to record the transactions for the year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate calculations to 2 decimal places.)

Prepare t-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these t-accounts (don’t forget to enter the beginning balances in your inventory accounts). (Round your intermediate calculations to 2 decimal places.) Is Manufacturing Overhead underapplied or overapplied for the year? Overapplied Underapplied 3-b. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate calculations to 2 decimal places.) Prepare an income statement for the year. (Round your intermediate calculations to 2 decimal places.)

Answer 1

Solution:

Part 1 --- Journal Entries

Transaction	Account Titles and Explanation	Debit	Credit
(a)	Raw materials inventory	$166,000
	Cash		$166,000
(b)	Work In Process Inventory (Direct materials)	$129,000
	Manufacturing Overhead (Indirect materials)	$14,000
	Raw materials Inventory		$143,000
c.	Work In Process Inventory (Direct labor)	$179,000
	Manufacturing Overhead (Indirect Labor)	$461,300
	Selling and Administrative Expenses (22000+ 46000)	$68,000
	Wages Payable		$708,300
d.	Manufacturing Overhead (Factory Rent)	$13,800
	Selling and Administrative Expenses	$4,600
	Rent Payable		$18,400
e.	Manufacturing Overhead (Utility Cost)	$11,000
	Accounts Payable		$11,000
f.	Selling and Administrative Expenses	$14,000
	Accounts Payable		$14,000
g.	Manufacturing Overhead (Depreciation - Factory Equipment)	$15,000
	Selling and Administrative Expenses	$8,000
	Accumulated Depreciation		$23,000
h.	Work In Process Inventory (Overhead Applied Refer Note 1)	$501,200
	Manufacturing Overhead		$501,200
i.	Finished Goods Inventory	$228,000
	Work In Process Inventory		$228,000
j(1).	Accounts Receivable	$503,000
	Sales Revenue		$503,000
j(2)	Cost of Goods Sold	$216,000
	Finished Goods Inventory		$216,000

Note 1 – Manufacturing Overhead Application Rate is calculated based on estimation.

Predetermined Overhead Rate = Estimated Total Manufacturing Overhead $126,000 / Estimated Direct Labor Dollars $45,000

= $2.80 per direct labor dollar or 280% of Direct Labor Cost

Applied Manufacturing Overhead = Actual Direct Labor Cost incurred x Predetermined Overhead Rate

= $179,000 x 2.80

= $501,200

Part 2 – T-Accounts

Raw Materials Inventory
Beg. Bal.	$10,900	$143,000	(b)
(a) Purchases	$166,000
Ending Bal.	$33,900
Work in Process Inventory
Beg. Bal.	$4,900	$228,000	(h) Completed Jobs
(b) Direct materials	$129,000
(c ) Direct labor	$179,000
(h) Applied MFR OH	$102,300
Ending Bal.	$187,200
Manufacturing Overhead
Beg. Bal.		$501,200	(h) Applied Overhead
(b) Indirect materials	$14,000
(c) Indirect labor	$461,300
(d) Rent	$13,800
(e) Utility Expense	$11,000
(g) Depreciation	$15,000
Ending Bal.	$13,900

Finished Goods Inventory
Beg. Bal.	$8,000	$216,000	j(2)
(h) Completed Jobs	$228,000
Ending Bal.	$20,000
Cost of Goods Sold
Beg. Bal.	0
j(2)	$216,000

Part 3-a --- Over or Under Applied Overhead

Applied Overheads are less than actual manufacturing overhead incurred.

It means Overheads are UNDER APPLIED.

Under Applied Overhead = $13,900

Part 3-b --- Journal Entry to close Manufacturing Overhead Account

Account Titles and Explanation	Debit	Credit
Cost of Goods Sold	$13,900
Manufacturing Overhead		$13,900

Part 4 --- Income Statement

Income Statement for the year
		$$
Sales Revenue		$503,000
Less: Adjusted Cost of Goods Sold (216,000 + Under Applied oH 13,900)		$229,900
Gross Profit		$273,100
Selling and Administrative Expenses:
Sales Commission	$22,000
Administrative Salaries	$46,000
Rent	$4,600
Advertising Cost	$14,000
Depreciation	$8,000
Total Selling and administrative Expenses		$94,600
Operating Profit		$178,500

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