Question

Bergamo Bay's computer system generated the following trial balance on December 31, 2017. The company’s manager knows something is wrong with the trial balance because it does not show any balance for Work in Process Inventory but does show a balance for the Factory Overhead account. In addition, the accrued factory payroll (Factory Payroll Payable) has not been recorded.

		Debit			Credit
Cash	$	59,000
Accounts receivable		39,000
Raw materials inventory		24,500
Work in process inventory		0
Finished goods inventory		15,000
Prepaid rent		5,000
Accounts payable				$	8,600
Notes payable					11,600
Common stock					50,000
Retained earnings					94,000
Sales					161,300
Cost of goods sold		110,000
Factory overhead		25,000
Operating expenses		48,000
Totals	$	325,500		$	325,500

After examining various files, the manager identifies the following six source documents that need to be processed to bring the accounting records up to date.

Materials requisition 21-3010:		$	4,800	direct materials to Job 402
Materials requisition 21-3011:		$	7,700	direct materials to Job 404
Materials requisition 21-3012:		$	2,500	indirect materials
Labor time ticket 6052:		$	8,000	direct labor to Job 402
Labor time ticket 6053:		$	5,000	direct labor to Job 404
Labor time ticket 6054:		$	1,000	indirect labor

Jobs 402 and 404 are the only units in process at year-end. The predetermined overhead rate is 100% of direct labor cost.

1) Determine the revised balance of the Factory Overhead account after making the entries in part 1 using T-accounts. Determine whether there is any under- or overapplied overhead for the year.
2)Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold, assuming the amount is not material.

3)Prepare a revised trial balance.
4)Prepare an income statement for 2017 and a balance sheet as of December 31, 2017.

Answer 1

1. Revised balance of Factory Overhead: $15500

Factory Overhead
Bal.	25000
Indirect materials	2500	13000	Overhead applied
Indirect labor	1000
End. Bal.	15500

2.

Account Titles and Explanation	Debit	Credit
Cost of goods sold	15500
Factory overhead		15500
(To close underapplied overheads to cost of goods sold)

3.

BERGAMO BAY COMPANY
Trial Balance
December 31, 2017
	Debit	Credit
Cash	59000
Accounts receivable	39000
Raw materials inventory	9500
Work in process inventory	38500
Finished goods inventory	15000
Prepaid rent	5000
Accounts payable		8600
Factory wages payable		14000
Notes payable		11600
Common stock		50000
Retained earnings		94000
Sales		161300
Cost of goods sold	125500
Factory overhead	0
Operating expenses	48000
Totals	339500	339500

4.

BERGAMO BAY COMPANY
Income Statement
For Year Ended December 31, 2017
Sales	161300
Cost of goods sold	125500
Gross profit	35800
Operating expenses	48000
Net income	-12200

BERGAMO BAY COMPANY
Balance Sheet
December 31, 2017
Assets
Cash		59000
Accounts receivable		39000
Inventories
Raw materials inventory	9500
Work in process inventory	38500
Finished goods inventory	15000	63000
Prepaid rent		5000
Total assets		166000
Liabilities and equity
Notes payable		11600
Accounts payable		8600
Factory wages payable		14000
Total liabilities		34200
Common stock		50000
Retained earnings		81800
Total stockholders' equity		131800
Total liabilities and equity		166000

Workings:

Raw materials = $24500 - $4800 - $7700 - $2500 = $9500

Work in process inventory:
Direct materials ($4800 + $7700)	12500
Direct labor ($8000 + $5000)	13000
Factory overheads applied (100% x $13000)	13000
Work in process inventory	38500

Factory wages payable = $8000 + $5000 + $1000 = $14000

Factory overhead = $25000 + $2500 + $1000 - $13000 = $15500

Cost of goods sold = $110000 + $15500 = $125500