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Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet...

Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below.

Star Videos, Inc.
Balance Sheet
January 1
Assets
Cash $ 89,200
Accounts receivable 106,600
Inventories:
Raw materials (film, costumes) $ 13,400
Videos in process 47,400
Finished videos awaiting sale 80,400 141,200
Prepaid insurance 8,350
Studio and equipment (net) 610,000
Total assets $ 955,350
Liabilities and Stockholders’ Equity
Accounts payable $ 238,000
Retained earnings 717,350
Total liabilities and stockholders’ equity $ 955,350

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year:

Film, costumes, and similar raw materials purchased on account, $229,000.

Film, costumes, and other raw materials issued to production, $230,500 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).

Utility costs incurred (on account) in the production studio, $92,600.

Depreciation recorded on the studio, cameras, and other equipment, $104,400. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.

Advertising expense incurred (on account), $143,000.

Salaries and wages paid in cash as follows:

Direct labor (actors and directors) $ 96,000
Indirect labor (carpenters to build sets, costume designers, and so forth) $ 75,500
Administrative salaries $ 103,000

Prepaid insurance expired during the year, $7,450 (70% related to production of videos, and 30% related to marketing and administrative activities).

Miscellaneous marketing and administrative expenses incurred (on account), $13,850.

Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.

Videos that cost $578,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.

Sales for the year totaled $954,000 and were all on account.

The total cost to produce the videos that were sold according to their job cost sheets was $623,910.

Collections from customers during the year totaled $904,000.

Payments to suppliers on account during the year, $608,000.

Underapplied or overapplied overhead $__?__.

Required:

1. Prepare a transaction analysis that records all of the above transactions.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

Solutions

Expert Solution

1.

Star Videos, Inc.
Transaction Analysis
For the Year Ended December 31
Cash Accounts Receivable Raw Materials Videos in Process Finished Videos Manufacturing Overhead Prepaid Insurance Studio & Equipment (net) = Accounts Payable Retained Earnings
Beginning balance @ 1/1 89200 106600 13400 47400 80400 0 8350 610000 = 238000 717350
Raw material purchases 229000 = 229000
Raw materials used -230500 195925 34575 =
Utility costs 92600 = 92600
Depreciation charges 78300 -104400 = -26100
Advertising = 143000 -143000
Salaries & wages -274500 96000 75500 = -103000
Prepaid insurance expired 5215 -7450 = -2235
Miscellaneous marketing = 13850 -13850
Applied overhead 290000 -290000 =
Transfer completed videos to finished goods -578000 578000 =
Sales 954000 = 954000
Transfer finished goods to cost of goods sold -623910 = -623910
Cash collections from customers 904000 -904000 =
Payment to suppliers -608000 = -608000
Overapplied overhead 3810 = 3810
Ending balances @12/31 110700 156600 11900 51325 34490 0 900 505600 = 108450 763065

2.

Star Videos, Inc.
Schedule of Cost of Goods Manufactured
For the Year Ended December 31
Beginning raw materials inventory $ 13400
Raw material purchases 229000
Raw materials available for use 242400
Ending raw materials inventory -11900
Raw materials used 230500
Less: Indirect materials -34575 195925
Direct labor 96000
Manufacturing overhead 290000
Total manufacturing costs 581925
Beginning videos in process inventory 47400
Total videos in process inventory 629325
Ending videos in process inventory -51325
Cost of goods manufactured 578000

3.

Star Videos, Inc.
Schedule of Cost of Goods Sold
For the Year Ended December 31
Cost of goods manufactured 578000
Beginning finished goods inventory 80400
Cost of goods available for sale 658400
Ending finished goods inventory -34490
Cost of goods sold 623910
Overapplied overhead -3810
Adjusted cost of goods sold $ 620100

4.

Star Videos, Inc.
Income Statement
For the Year Ended December 31
Sales revenue 954000
Cost of goods sold 620100
Gross profit 333900
Operating expense:
Depreciation expense 26100
Advertising expense 143000
Salaries & wages expense 103000
Insurance expense 2235
Miscellaneous marketing and adm. expense 13850
Total operating expense 288185
Net income 45715

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