Question

Problem 3-15 Journal Entries; T-Accounts; Financial Statements [LO3-1, LO3-2, LO3-3, LO3-4]

Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a cost formula that estimated $350,000 of manufacturing overhead for an estimated allocation base of 1,000 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $250,000.
2. Raw materials used in production (all direct materials), $235,000.
3. Utility bills incurred on account, $69,000 (90% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,075 hours)	$	280,000
Indirect labor	$	100,000
Selling and administrative salaries	$	160,000

1. Maintenance costs incurred on account in the factory, $64,000
2. Advertising costs incurred on account, $146,000.
3. Depreciation was recorded for the year, $82,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment).
4. Rental cost incurred on account, $107,000 (80% related to factory facilities, and the remainder related to selling and administrative facilities).
5. Manufacturing overhead cost was applied to jobs, $ ? .
6. Cost of goods manufactured for the year, $870,000.
7. Sales for the year (all on account) totaled $1,700,000. These goods cost $900,000 according to their job cost sheets.

The balances in the inventory accounts at the beginning of the year were:

Raw Materials	$	40,000
Work in Process	$	31,000
Finished Goods	$	70,000

Required:

1. Prepare journal entries to record the preceding transactions.

2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)

3. Prepare a schedule of cost of goods manufactured.

4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4B. Prepare a schedule of cost of goods sold.

5. Prepare an income statement for the year.

Answer 1

1. Froya Fabrikker A/S of Bergen

Journal Entries

S.N.	Particular	Debit($)	Credit($)
1	Raw Material Inventory	250000
	Accounts Payable		250000
2.	Work in Process	235000
	Raw Material Inventory		235000
3.	Manufacturing Overhead	62100
	Utility expenses	6900
	Utility Payable		69000
4.	Work in Process	280000
	Manufactruing Overhead	100000
	Selling and Administrative Salaries	160000
	Wages Payable		540000
5.	Manufacturing Overhead	64000
	Accounts Payable		64000
6.	Advertising Expenses	146000
	Accounts Payable		146000
7.	Manufacturing Overhead	61500
	Depreciation	20500
	Accmulated Depreciation		82000
8.	Manufacturing Overhead	85600
	Rental Expenses	21400
	Rent Payable		107000
9.	Work in Process (See WN)	376250
	Manufacturing Overhead		376250
10.	Finished Goods	870000
	Work in Process		870000
11.	Accounts Receivable	1700000
	Sales		1700000
12.	Cost of Goods Sold	900000
	Finished Goods		900000

Working Notes:

Predetermined Overhead rate=350000/1000= 350 per direct labour hour

So, Manufacturing overhead = 3501075=$376250.

2. T- Accounts

Raw Material Inventory Account

Beginning Balance	40000	Work in Process	235000
Accounts Payable	250000	balance	55000

Work In Process Account

Beginnig Balance	31000	Finished Goods	870000
Raw Material Inventory	235000
Wages Payable	250000
Manufacturing Overhead	408500	balance	22250

Finished Goods

Beginning balance	70000	Cost of goods Sold	900000
Work in Process	870000	Balance	40000

Manufacturing Overhead Account

Utility Payable	62100	Work in Process	376250
Wages Payable	100000
Accounts Payable	64000
Accumulated Depreciation	61500
Rental Payable	85600
Balance	3050

3. Schedule of Cost Of Goods Manufactured

Particular	Amount(4)
Direct Material	235000
Direct Labour	280000
Manufacturing Overhead	376250
Total Manufacturing Cost	891250
+ Beginning Work in Process	31000
- Ending Work in Process	(22250)
Cost of goods Manufactured	900000

4A.Schedule of Cost of Goods Sold

particular	Amount ($)
Beginning finished Goods	70000
Cost of Goods Manufactured	870000
Cost of Goods Available for Sale	940000
- Ending Finished Goods	(40000)
Unadjusted cost of Goods sold	900000
- Overapplied Overhead	(3050)
Cost of Goods Sold	896950

5. Income Statement

particular	Amount ($)
Sales	1700000
- Cost of Goods Sold	(896950)
Gross Profit	803050
- expenses
Utility Expenses	(6900)
Salaries and Administrative	(160000)
Advertising Expenses	(146000)
Depreciation	(20500)
Rental Expenses	(21400)
Net Operating Income	448250