Question

Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below. Star Videos, Inc. Balance Sheet January 1 Assets Cash $ 89,200 Accounts receivable 106,600 Inventories: Raw materials (film, costumes) $ 13,400 Videos in process 47,400 Finished videos awaiting sale 80,400 141,200 Prepaid insurance 8,350 Studio and equipment (net) 610,000 Total assets $ 955,350 Liabilities and Stockholders’ Equity Accounts payable $ 238,000 Retained earnings 717,350 Total liabilities and stockholders’ equity $ 955,350 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 ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year: Film, costumes, and similar raw materials purchased on account, $229,000. Film, costumes, and other raw materials issued to production, $230,500 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect). Utility costs incurred (on account) in the production studio, $92,600. Depreciation recorded on the studio, cameras, and other equipment, $104,400. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration. Advertising expense incurred (on account), $143,000. Salaries and wages paid in cash as follows: Direct labor (actors and directors) $ 96,000 Indirect labor (carpenters to build sets, costume designers, and so forth) $ 75,500 Administrative salaries $ 103,000 Prepaid insurance expired during the year, $7,450 (70% related to production of videos, and 30% related to marketing and administrative activities). Miscellaneous marketing and administrative expenses incurred (on account), $13,850. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year. Videos that cost $578,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment. Sales for the year totaled $954,000 and were all on account. The total cost to produce the videos that were sold according to their job cost sheets was $623,910. Collections from customers during the year totaled $904,000. Payments to suppliers on account during the year, $608,000. Underapplied or overapplied overhead $__?__. Required: 1. Prepare a transaction analysis that records all of the above transactions. 2. Prepare a schedule of cost of goods manufactured for the year. 3. Prepare a schedule of cost of goods sold for the year. 4. Prepare an income statement for the year.

Answer 1

1) Journal Entries:
Date	Accounts title	Debit $	Credit $
1	RM	229000
	AP		229000
	(RM on account)
2	WIP	195925
	Manuf O/H	34575
	RM		230500
	(RM allotted to WIP & Manuf O/h)
3	Manuf O/H	92600
	AP		92600
	(utility cost on account)
4	Manuf O/H	78300
	Adminis & Mark.	26100
	Depreciation cost		104400
	(depreciation apportioned to factory & administration)
5	Adminis & Mark.	143000
	AP		143000
	(advertisement exp. incurred on account)
6	WIP	96000
	Manuf O/H	75500
	Adminis & Mark.	103000
	Payroll exp		274500
	(salary exp made in cash)
7	Manuf O/H	5215
	Adminis & Mark.	2235
	Insurance exp		7450
	(insurance exp made)
8	Adminis & Mark.	13850
	Miscel. Exp		13850
	(Miscel exp made)
9	WIP	290000
	Manuf O/H		290000
	(Manuf O/H applied)
10	FG Inventory	578000
	WIP		578000
	(finished goods transferred)
11	AR	954000
	Sales		954000
	(sales booked on account)
12	COGS	623910
	FG Inventory		623910
	(COGS booked)
13	Cash	904000
	AR		904000
	(collection from AR)
14	AP	608000
	Cash		608000
	(payment to AP)

2) Costs of Goods Manufactured:
WIP Opening Bal		47800
RM:
OB	13400
Pur	229000
RM available	242400
less: CB	11900
RM consum		230500
less: O/h RM		-34575
DL		96000
Manuf O/H		290000
Total Manufacturing cost incurred		629725
Less: Closing WIP		-51725
Cost of Goods Manufactured		578000
3)Cost of Goods Sold:
Finished Goods Opening	80400
Add:COGM	578000
FG Inventory available	658400
Less: FG - CB	-34490
COGS	623910
4)Income Statement:
Sales	954000
less: COGS	-623910
Gp	330090
less: Admin & Marketing exp.:	288185
Net Operating Income	41905

overapplied overhead $ 3810