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 $67,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,900
Work in process	$	4,500
Finished goods	$	8,900

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 163,000.
2. Raw materials used in production, $147,000 (materials costing $124,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	159,000
Indirect labor	$	156,800
Sales commissions	$	23,000
Administrative salaries	$	45,000

4. Rent for the year was $18,000 ($13,800 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $13,000.
6. Advertising costs incurred, $10,000.
7. Depreciation recorded on equipment, $24,000. ($17,000 of this amount related to equipment used in factory operations; the remaining $7,000 related to equipment used in selling and administrative activities.)
8. Manufacturing overhead cost was applied to jobs, $ ? .
9. Goods that had cost $230,000 to manufacture according to their job cost sheets were completed.
10. Sales for the year (all paid in cash) totaled $509,000. The total cost to manufacture these goods according to their job cost sheets was $216,000.

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.

• Utility cost incurred in the factory, $13,000.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit e.

.

• Advertising cost incurred, $10,000.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit f.

• Depreciation recorded on equipment, $24,000. ($ 17,000 of this amount related to equipment used in factory operations; the remaining $ 7,000 related to equipment used in selling and administrative activities.)

Note: Enter debits before credits.

	Transaction General Journal Debit Credit g. . Manufacturing overhead cost was applied to jobs, $?. Note: Enter debits before credits. Transaction General Journal Debit Credit h.

• Goods that had cost $230,000 to manufacture according to their job cost sheets were completed.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit i.

.

• Sales for the year (all paid in cash) totaled $509,000.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit j(1).

• The total cost to manufacture these goods according to their job cost sheets was $216,000.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit j(2).

Answer 1

1)	Journal Entries
	Particulars				Debit	Credit
a)	R.M				$ 163,000.00
	To Accounts Payable					$ 163,000.00
b)	WIP				$ 124,000.00
	Factory OH				$   23,000.00
	To R.M					$ 147,000.00
c)	WIP				$ 159,000.00
	Manu. OH				$ 156,800.00
	Sales commissions expense				$   23,000.00
	Adm. Salaries expense				$   45,000.00
	To Salaries and wages payable					$ 383,800.00
d)	Manu. OH				$   13,800.00
	Rent Expense				$     4,200.00
	To Accounts Payable					$   18,000.00
e)	Manu. OH				$   13,000.00
	To Accounts Payable					$   13,000.00
f)	Advertising Expense				$   10,000.00
	To Accounts Payable					$   10,000.00
g)	Manu. OH				$   17,000.00
	Depreciation Expense				$     7,000.00
	To Accumulated Depreciation					$   24,000.00
h)	WIP				$ 238,500.00
	To Manu. OH					$ 238,500.00
	($ 67500 /$ 45000) x $ 159000
i)	Finished Goods				$ 230,000.00
	To WIP					$ 230,000.00
j)	Cash				$ 509,000.00
	To Sales					$ 509,000.00
	Cost of Goods Sold				$ 216,000.00
	To Finished Goods					$ 216,000.00

2)		Raw Materials					WIP					Finished Goods
		Beg. Bal	$    10,900.00	b)	$ 147,000.00		Beg. Bal.	$      4,500.00	i)	$ 230,000.00		Beg. Bal.	$      8,900.00	j)	$ 216,000.00
		a)	$ 163,000.00	End. Bal.	$    26,900.00		b)	$ 124,000.00	End. Bal.	$ 296,000.00		i)	$ 230,000.00	End. Bal.	$    22,900.00
			$ 173,900.00		$ 173,900.00		c)	$ 159,000.00					$ 238,900.00		$ 238,900.00
							h)	$ 238,500.00
								$ 526,000.00		$ 526,000.00
		Manufacturing OH					Cost of Goods sold
		b)	$    23,000.00	h)	$ 238,500.00		j)	$ 216,000.00
		c)	$ 156,800.00
		e)	$    13,000.00
		g)	$    17,000.00
		d)	$    13,800.00

3)
a)	Actual OH expenses		$ 209,800.00
	Applied OH		$ 238,500.00
	Overapplied		$   28,700.00
b)	Manu. OH		$   28,700.00
	To Cost of Goods Sold			$ 28,700.00

	4)
	Income Statement
	Sales				$   509,000.00
Less:	COGS	($ 216000 - $ 28700)			$   187,300.00
	Gross Profit				$   321,700.00
	Selling and adm. Expenses:
	Sales commission			$ 23,000.00
	Adm. Salaries expense			$ 45,000.00
	Advertising expense			$ 10,000.00
	Depreciation Expense			$   7,000.00
	Rent Expense			$   4,200.00
					$     89,200.00
		Net Income			$   232,500.00