In: Accounting
Running Data began operations on February 1. The company produces GPS watches designed for runners. On February 15, the company purchased 1,600 DVD discs to include with each running watch it sells. The DVD is preloaded with product setup information, an instruction manual including video examples, and warranty details. Each disc cost Running Data $7.
During February, 500 discs were taken from the raw materials inventory. Of these, 80 were taken by the sales manager to sales meetings with prospective retailers to carry the watches and handed out as advertising. The remaining discs were included with the GPS watches that were being manufactured in February. Of the watches that were bundled with the discs during May, 75% were completed and transferred from work in process to finished goods. Of the watches completed during the month, 60% were sold and shipped to customers.
1. Determine the cost of discs that would be in each of the following accounts at February 28:
raw material
work in process
finihed goods'
COGS
advertising expense
2. Specify whether each of the above accounts would appear on the balance sheet or on the income statement at February 28.
raw material
work in process
finished goods
COGS
advertising exp
1) Units of Discs in Raw Material on February 28
= Discs Purchased – Discs Transfer to Advertising – Discs Transfer to Production
= 1600 – 80 – (500-80) = 1100 discs
Cost of Discs in Raw Material on February 28
= Units of Discs in Raw Material on February 28 * Cost per disc
= 1100 * 7 = $ 7700
Units of Discs in Work in Progress on February 28
= Discs transferred to production – Discs transferred to Finished Goods
= 420 – (420*75%) = 105 discs
Cost of Discs in Work in Progress on February 28
= Units of Discs in Work in Progress on February 28 * Cost per disc
= 105 * 7 = $ 735
Units of Discs in Finished Goods on February 28
= Discs transferred to Finished Goods – Discs sold
= (420*75%) – {(420*75%)*60%} = 126 discs
Cost of Discs in Finished Goods on February 28
= Units of Discs in Finished Goods on February 28 * Cost per disc
= 126 * 7 = $ 882
Cost of Discs in COGS on February 28
= Discs Sold * Cost per disc
= {(420*75%)*60%} * 7 = $ 1323
Advertising Expense = Discs Transferred to Advertising * Cost per disc
= 80 * 7 = $ 560
2) Items Appearing in Balance Sheet at February 28:
Items Appearing in Income Statement at February 28: