Question

Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales.

The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $330,000 of manufacturing overhead for an estimated activity level of $200,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	25,000
Work in process	$	10,000
Finished goods	$	40,000

During the year, the following transactions were completed:

1. Raw materials purchased on account, $275,000.
2. Raw materials used in production, $280,000 (materials costing $220,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	180,000
Indirect labor	$	72,000
Sales commissions	$	63,000
Administrative salaries	$	90,000

4. Rent for the year was $18,000 ($13,000 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $57,000.
6. Advertising costs incurred, $140,000.
7. Depreciation recorded on equipment, $100,000. ($88,000 of this amount related to equipment used in factory operations; the remaining $12,000 related to equipment used in selling and administrative activities.)
8. Record the manufacturing overhead cost applied to jobs.
9. Goods that had cost $675,000 to manufacture according to their job cost sheets were completed.
10. Sales for the year (all paid in cash) totaled $1,250,000. The total cost to manufacture these goods according to their job cost sheets was $700,000.

Required:

1. Prepare journal entries to record the transactions for the year.

2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning balances in your inventory accounts).

3A. Is Manufacturing Overhead underapplied or overapplied for the year?

3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4. Prepare an income statement for the year. (All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.)

Answer 1

1. Prepare journal entries to record the transactions for the year.

Gold Nest Company
Journal entries
Date	General Journal	Debit	Credit
A	Raw material inventory	$            275,000
	Account payable		$            275,000
	To record Purchase of raw material inventory
B	Work in progress inventory	$            220,000
	Manufacture overhead (280000-220000)	$              60,000
	Raw material inventory		$            280,000
	To record Issue of raw material inventory.
C	Work in progress inventory	$            180,000
	Manufacture overhead	$              72,000
	Sales commissions Expenses	$              63,000
	Salaries Expenses - Administrative	$              90,000
	Cash		$            405,000
	To record labor cost incurred.
D	Manufacture overhead	$              13,000
	Rent Expense (18000-13000)	$                5,000
	Cash		$              18,000
	To record rent cost.
E	Manufacture overhead	$              57,000
	Cash		$              57,000
	To record utility costs.
F	Advertising expense	$            140,000
	Cash		$            140,000
	To record Advertising expense.
G	Manufacture overhead	$              88,000
	Depreciation Expense	$              12,000
	Accumulated depreciation		$            100,000
	To record Depreciation on equipment
H	Work in progress inventory (180000*165%)	$            297,000
	Manufacture overhead		$            297,000
	To record Manufacture overhead Applied to Job.
I	Finished goods inventory	$            675,000
	Work in progress inventory		$            675,000
	To record completion of Finished goods inventory.
J	Cost of goods sold	$            700,000
	Finished goods inventory		$            700,000
	To record finished goods inventory sold.
J	Cash	$        1,250,000
	Sales Revenue		$        1,250,000
	To record sales revenue.

2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning balances in your inventory accounts).

Raw material Inventory
Transaction	Debit	Credit	Transaction
Beginning Balance	$        25,000	$        280,000	B
A	$      275,000
Ending Balance	$        20,000

Work in Progress Inventory
Transaction	Debit	Credit	Transaction
Beginning Balance	10,000	675,000	I
B	220,000
C	180,000
H	297,000
Ending Balance	$     32,000

Finished Goods Inventory
Transaction	Debit	Credit	Transaction
Beginning Balance	$        40,000	$        700,000	J
I	$      675,000
Ending Balance	$        15,000

Cost of Goods sold
Transaction	Debit	Credit	Transaction
J	$      700,000
Ending Balance	$      700,000

Manufacture Overhead
Transaction	Debit	Credit	Transaction
		297,000	H
B	60,000
C	72,000
D	13,000
E	57,000
G	88,000
		7,000	Ending Balance

3A. Is Manufacturing Overhead underapplied or overapplied for the year?

Manufacture overhead is overhead applied. Because the manufacture overhead T account has a credit balance, which indicates the overhead applied.

3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

Date	General Journal	Debit	Credit
Adj	Manufacture overhead	$                7,000
	Cost of goods sold		$                7,000
	To record over applied of manufacture overhead.

4. Prepare an income statement for the year. (All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.)

Gold Nest Company
Income statement
Sales revenue		$        1,250,000
Less: Cost of goods sold (700000-7000 of Over applied)		$            693,000
Gross Profit		$            557,000
Less: Selling and Administrative Expenses
Sales commissions Expenses	$          63,000
Salaries Expenses - Administrative	$          90,000
Rent Expense (18000-13000)	$            5,000
Advertising expense	$        140,000
Depreciation Expense	$          12,000
Total Selling and Administrative Expenses		$            310,000
Net income		$            247,000