Question

At the end of the period, Carson Company had the following balances in selected accounts:

Materials	$ 80,000
Finished goods	190,000
Work in process	70,000
Cost of goods sold	1,000,000
Factory overhead	30,000

Required:

	(a) The factory overhead balance is relatively small; prepare the journal entry to close the factory overhead account assuming a debit balance. What does a debit balance mean?
	(b) The factory overhead balance is relatively small; prepare the journal entry to close the factory overhead account assuming a credit balance. What does a credit balance mean?
	Refer to the Chart of Accounts for exact wording of account titles.

CHART OF ACCOUNTSCarson CompanyGeneral Ledger

	ASSETS
110	Cash
121	Accounts Receivable
131	Materials
133	Work in Process
135	Factory Overhead
137	Finished Goods
141	Supplies
142	Prepaid Expenses
181	Land
190	Factory Equipment
191	Accumulated Depreciation

	LIABILITIES
210	Accounts Payable
221	Utilities Payable
251	Wages Payable

	EQUITY
311	Common Stock
340	Retained Earnings
351	Dividends
390	Income Summary

	REVENUE
410	Sales
610	Interest Revenue

	EXPENSES
510	Cost of Goods Sold
520	Wages Expense
531	Insurance Expense
532	Utilities Expense
533	Office Supplies Expense
560	Depreciation Expense
590	Miscellaneous Expense
710	Interest Expense

(a) The factory overhead balance is relatively small; prepare the journal entry to close the factory overhead account assuming a debit balance on December 31.
	(b) The factory overhead balance is relatively small; prepare the journal entry to close the factory overhead account assuming a credit balance on December 31.
	Refer to the Chart of Accounts for exact wording of account titles.

PAGE 1

JOURNAL

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT
1
2
3
4

What does a debit balance mean?
A debit balance indicates that the factory overhead was .
What does a credit balance mean?
A debit balance indicates that the factory overhead was .

Answer 1

a. Since the factory Factory overhead balance has a debit balance and is relatively small (Immaterial), the journal entry is as follows:

	Date	Description	Debit	Credit
1	Year end	Cost of Goods Sold a/c	30,000
		Factory Overhead a/c		$30,000
		[Underapplied factory overhead adjusted]

***A debit balance in factory overhead indicates that the factory overhead is underapplied. Underapplied overhead arises when actual overhead expenses is more than than the estimated overhead.

b. Since the factory Factory overhead balance has a credit balance and is relatively small (Immaterial), the journal entry is as follows:

	Date	Description	Debit	Credit
1	Year end	Factory Overhead a/c	$30,000
		Cost of Goods Sold a/c		$30,000
		Overapplied factory overhead adjusted]

***A Credit balance in factory overhead indicates that the factory overhead is Overapplied. Overapplied overhead arises when actual overhead expenses is less than than the estimated overhead.