Question

Problem 3-16 (Algo) Comprehensive Problem [LO3-1, LO3-2, LO3-4]

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.

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 $95,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,900
Work in process	$	4,600
Finished goods	$	8,700

During the year, the following transactions were completed:

1. Raw materials purchased on account, $163,000.
2. Raw materials used in production, $142,000 (materials costing $128,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	157,000
Indirect labor	$	224,700
Sales commissions	$	29,000
Administrative salaries	$	44,000

1. Rent for the year was $18,100 ($13,800 of this amount related to factory operations, and the remainder related to selling and administrative activities).
2. Utility costs incurred in the factory, $16,000.
3. Advertising costs incurred, $11,000.
4. Depreciation recorded on equipment, $20,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $4,000 related to equipment used in selling and administrative activities.)
5. Manufacturing overhead cost was applied to jobs, $ ? .
6. Goods that had cost $227,000 to manufacture according to their job cost sheets were completed.
7. Sales for the year (all paid in cash) totaled $507,000. The total cost to manufacture these goods according to their job cost sheets was $219,000.

Required:

1. Prepare journal entries to record the transactions for the year.

2. Prepare T-accounts for each inventory account, 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).

3A. Is Manufacturing Overhead underapplied or overapplied for the year?

3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4. Prepare an income statement for the year. All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.

Answer 1

1. Journal Entries

Event	General journal	Debit	Credit
a	Raw materials	163000
	Cash		163000
	(Raw material purchased)
b	Work in process	128000
	Manufacturing overhead	14000
	Raw materials		142000
	(Raw materials used in production)
c	Work in process	157000
	Manufacturing overhead	224700
	Sales commission expense	29000
	Salaries expense	44000
	Cash		454700
	(Cash paid to employees)
d	Manufacturing overhead	13800
	Rent expense	4300
	Cash		18100
	(Cash paid for rent)
e	Manufacturing overhead	16000
	Cash		16000
	(Cash paid for utility costs)
f	Advertising expense	11000
	Cash		11000
	(Cash paid for advertisement)
g	Manufacturing overhead	16000
	Depreciation expense	4000
	Accumulated Depreciation		20000
	(Depreciation recorded on equipment)
h	Work in process	298300**
	Manufacturing overhead		298300**
	(Manufacturing overhead applied)
i	Finished goods	227000
	Work in process		227000
	(Goods manufacturing and transferred to finished goods)
j	Cash	507000
	Sales revenue		507000
	(to record sales)
j2	Cost of goods sold	219000
	Finished goods		219000
	(to record cost of goods sold)

Predetermined overhead rate:

Predetermined overhead rate= Estimated manufacturing overhead/Estimated direct labor cost

=95000/50000

=$1.9 per direct labor cost

Applied manufacturing overhead cost:

Applied manufacturing overhead cost= Actual direct labor cost*predetermined overhead rate

=157000*1.9

=$298300**

2. T-Accounts

Raw material
Debit		Credit
Event	Amount	Event	Amount
Beginning Balance	10900	b	142000
a	163000
Closing balance	31900

Work in process
Debit		Credit
Event	Amount	Event	Amount
Beginning Balance	4600	i	227000
b.	128000
c.	157000
h.	298300
Closing balance	360900

Finished Goods
Debit		Credit
Event	Amount	Event	Amount
Beginning Balance	8700	j2	219000
i.	227000
Closing Balance	16700

Manufacturing overhead
Debit		Credit
Event	Amount	Event	Amount
b.	14000	h.	298300
c.	224700
d.	13800
e.	16000
g.	16000
		Closing balance	13800

3A. manufacturing overhead over-applied or under-applied

Manufacturing overhead cost incurred:	Amount
Indirect Materials	14000
Indirect labor	224700
Factory rent	13800
utility cost	16000
Depreciation on equipment	16000
A. total manufacturing cost incurred	284500
B. Manufacturing overhead applied	298300
c. over-applied /(under-applied)(B-A)	13800

Manufacturing overhead was over-applied from $13800

3B. Journal entry to close any balance in manufacturing overhead

Event	General journal	Debit	Credit
Adjustment	Manufacturing overhead	13800
	Cost of goods sold		13800

4. Income Statement

Revised cost of goods sold balance:

Cost of goods sold=219000

Manufacturing overhead over-applied=(13800)

Revised balance of cost of goods sold=219000-13800=205200

Income statement
Particulars		Amount
Sales		507000
Cost of goods sold		(205200)
Gross profit		301800
Operating expenses:
Sales commission	29000
Administrative salaries	44000
Rent expense(18100-13800)	4300
Advertisement expense	11000
Depreciation expense()	4000
Total operating expense		(92300)
Net income		209500

------------HOPE THIS IS HELPFUL