Question

Supreme Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1, the beginning of its fiscal year, are given below: Supreme Videos, Inc. Balance Sheet January 1 Assets Current assets: Cash $69,000 Accounts receivable 108,000 Inventories: Raw materials (film, costumes) $36,000 Videos in process 51,000 Finished videos awaiting sale 87,000 174,000 Prepaid insurance 10,200 Total current assets 361,200 Studio and equipment 742,000 Less accumulated depreciation 216,000 526,000 Total assets $887,200 Liabilities and Stockholders' Equity Accounts payable $185,200 Capital stock $426,000 Retained earnings 276,000 702,000 Total liabilities and stockholders' equity $887,200 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 is based on a cost formula that estimated $200,000 in manufacturing overhead for an estimated allocation base of 4,000 camera-hours. The following transactions were recorded for the year: a. Film, costumes, and similar raw materials purchased on account, $191,000. b. Film, costumes, and other raw materials issued to production, $206,000 (75% of this material was considered direct to the videos in production, and the other 25% was considered indirect). c. Utility costs incurred in the production studio, $78,000 for account. d. Depreciation recorded on the studio, cameras, and other equipment, $90,000. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration. e. Advertising expense incurred, $136,000 for account. f. Costs for salaries and wages were incurred as follows: Direct labor (actors and directors) $ 88,000 Indirect labor (carpenters to build sets, costume designers, and so forth) $ 116,000 Administrative salaries $ 101,000 g. Prepaid insurance expired during the year, $7,600 (70% related to production of videos, and 30% related to marketing and administrative activities). h. Miscellaneous marketing and administrative expenses incurred, $9,200 for account. i. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,000 camera-hours of activity during the year. j. Videos that cost $556,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment. k. Sales for the year totaled $937,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $606,000. l. Collections from customers during the year totaled $856,000. m. Payments to suppliers on account during the year, $506,000; payments to employees for salaries and wages, $291,000. Required: 1&2. Prepare a T-account for each account on the company’s balance sheet, and enter the beginning balances. Make an entry directly into the T-accounts for transactions (a) through (m). 3. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year? By how much? 4. Prepare an income statement for the year. rev: 09_22_2017_QC_CS-101615 ReferenceseBook & Resources WorksheetLearning Objective: 02-02 Apply overhead cost to jobs using a predetermined overhead rate.Learning Objective: 02-07 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.

Answer 1

Cash				Accounts receivable				Raw material
Beg.	70000	m	507000	Beg.	109000	l	857000	Beg.	37000	b	207000
l	857000	m	292000	j	939000			a	192000
	927000		799000		1048000		857000		229000		207000
Ending bal	128000			Ending bal	191000			Ending bal	22000
Prepaid insurance				Video in progress				Finished goods
Beg.	10400	g	7700	Beg.	52000	j	557000	Beg.	88000	k	607000
				b)	165600			j	557000
	10400		7700	f	89000
Ending bal	2700			i	336000
					642600		557000		645000		607000
				Ending bal	85600			Ending bal	38000
Studio and equipment				Accumulated depreciation				Depreciation expense
Beg.	744000					Beg.	217000	D	22750
						d	91000		22750		0
	744000		0					Ending bal	22750
Ending bal	744000				0		217000
						Ending bal	217000	Studio Overhead
								b	41400	i	336000	(240000*7000/5000)
								c	79000
Insurance expense				Advertising expense				d	68250
g	1925			e	137000			f	117000
								g	5775
								n	24575
									336000		336000
								Ending bal	0
Admin and salaries expense				Sales				Cost of goods sold
						j	939000	j	607000	n	24575
f	102000
									607000		24575
								Ending bal	582425
Accounts payable				Salaries and wages payable				Capital stock
m	507000	Beg.	189400	M	292000	F	308000			Beg.	427000
		a	192000
		c	79000
		e	137000
		h	9300		292000		308000
	507000		606700			Ending bal	16000
		Ending bal	99700
Retained earnings				Misc. Expense
		Beg.	277000	h	9300

3	Manufacturing overhead over applied by				24575	(336000-311425)
4	Income statement
	Sales			939000
	Cost of goods sold			582425
	Gross profit			356575
	Selling and admin expense
	Depreciation expense		22750
	Misc. Expense		9300
	Advertising expense		137000
	Insurance expense		1925
	Administrative salaries		102000	272975
	Net operating profit			83600