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 $96,000 of manufacturing overhead for an estimated activity level of $40,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

  

Raw materials	$	10,800
Work in process	$	4,700
Finished goods	$	8,200

  

During the year, the following transactions were completed:

a.	Raw materials purchased for cash, $162,000.
b.	Raw materials requisitioned for use in production, $149,000 (materials costing $128,000 were charged directly to jobs; the remaining materials were indirect).
c.	Costs for employee services were incurred as follows:

  

Direct labor	$	156,000
Indirect labor	$	319,100
Sales commissions	$	26,000
Administrative salaries	$	42,000

  

d.	Rent for the year was $18,400 ($13,200 of this amount related to factory operations, and the remainder related to selling and administrative activities).
e.	Utility costs incurred in the factory, $19,000.
f.	Advertising costs incurred, $10,000.
g.	Depreciation recorded on equipment, $20,000. ($16,000 of this amount was on equipment used in factory operations; the remaining $4,000 was on equipment used in selling and administrative activities.)
h.	Manufacturing overhead cost was applied to jobs, $?
i.	Goods that had cost $229,000 to manufacture according to their job cost sheets were completed.
j.	Sales for the year totaled $511,000. The total cost to manufacture these goods according to their job cost sheets was $215,000.

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.)

      

2.	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.)

  

3-a.	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.)

        

4.	Prepare an income statement for the year. (Round your intermediate calculations to 2 decimal places.)

        

Answer 1

	JOURNAL ENTRIES
	Ref	Account Title & explanation	Debit	Credit
	a	Raw materials inventory	$162,000
		Cash		$162,000
		(To record pirchase of raw materials)
	b	Work in process	$128,000
		Manufacturing overhead	$21,000		(149000-128000)
		Raw material inventory		$149,000
		(To record issue of raw materials)
	c	Work in process	$156,000
		Manufacturing overhead	$319,100
		Sales expenses	$26,000
		Administrative expenses	$42,000
		Cash		$543,100
		(To record employee expenses)
	d	Manufacturing overhead	$13,200
		Selling & Administrative expenses	$5,200		(18400-13200)
		Cash		$18,400
		(To record rent expenses )
	e	Manufacturing overhead	$19,000
		Cash		$19,000
		(To record utilities expenses )
	f	Sales & administrative expenses	$10,000
		Cash		$10,000
		(To record advertising expenses)
	g	Manufacturing overhead	$16,000
		Selling & administrative overhead	$4,000		(20000-16000)
		Accumulated depreciation		$20,000
		To record depreciation expenses)
	h	Work in process	$        374,400		(Direct labor rate=96000/40000=			2.4
		Manufacturing overhead		$ 374,400	(156000*2.4)
		(To record manufacturing overhead applied)
	i	Finished goods inventory	$229,000
		Work in process		$229,000
		(To record transfer of jobs to finished goods)
	j	Cash	$511,000
		Sales		$511,000
		Cost of goods sold	$215,000
		Finished goods inventory		$215,000
		(To record sales on cash)
		T-ACCOUNTS
		INVENTORY	Debit	Credit
		Beginning balance	$10,800
	a	Cash	$162,000
	b	Work in process & overhead		$149,000
		Ending balance	$23,800
		MANUFACTURING OVERHEAD	Debit	Credit
	b	Raw material inventory	$21,000
	c	Cash	$319,100
	d	Cash	$13,200
	e	Cash	$19,000
	g	Accumulated depreciation	$16,000
		Total	$388,300
	h	Work in process		$ 374,400
		Balance	$13,900
		COST OF GOODS SOLD	Debit	Credit
		Finished goods inventory	$215,000
		Manufacturing overhead	$13,900
		Total	$228,900
	3	Manufacturing overhead incurred	$388,300
		Manufacturing overhead applied	$        374,400
		Manufacturing overhead	UNDER-APPLIED
	3b	CLOSING ENTRY
		Cost of goods sold	$13,900
		Manufacturing overhead		$13,900
	4	INCOME STATEMENT
		Sales		$511,000
		Cost of goods sold		$228,900
		Gross Profit		$282,100
		Sales & Administration expenses:
		Sales salaries	$26,000
		Administrative salaries	$42,000
		Rent expenses	$5,200
		Advertising expenses	$10,000
		Depreciation expenses	$4,000
		Total Sales & Administrative expenses		$87,200
		INCOME BEFORE INTEREST & TAXES		$194,900