Question

Supreme Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1, are given below. Supreme Videos, Inc. Balance Sheet January 1 Assets Current assets: Cash $ 78,000 Accounts receivable 117,000 Inventories: Raw materials (film, costumes) $ 45,000 Videos in process 23,000 Finished videos awaiting sale 96,000 164,000 Prepaid insurance 12,000 Total current assets 371,000 Studio and equipment 760,000 Less accumulated depreciation 225,000 535,000 Total assets $ 906,000 Liabilities and Stockholders' Equity Accounts payable $ 117,000 Capital stock $ 504,000 Retained earnings 285,000 789,000 Total liabilities and stockholders' equity $ 906,000 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 is based on a cost formula that estimated $270,000 in manufacturing overhead for an estimated allocation base of 6,000 camera-hours. The following transactions occurred during the year: Film, costumes, and similar raw materials purchased on account, $200,000. Film, costumes, and other raw materials used in production, $215,000 (80% of this material was considered direct to the videos in production, and the other 20% was considered indirect). Utility costs incurred on account in the production studio, $87,000. Depreciation recorded on the studio, cameras, and other equipment, $99,000. Three-fourths of this depreciation related to production of the videos, and the remainder related to equipment used in marketing and administration. Advertising expense incurred on account, $145,000. Costs for salaries and wages were incurred on account as follows: Direct labor (actors and directors) $ 97,000 Indirect labor (carpenters to build sets, costume designers, and so forth) $ 125,000 Administrative salaries $ 110,000 Prepaid insurance expired during the year, $8,500 (75% related to production of videos, and 25% related to marketing and administrative activities). Miscellaneous marketing and administrative expenses incurred on account, $10,100. Studio (manufacturing) overhead was applied to videos in production. The company used 7,800 camera-hours during the year. Videos that cost $565,000 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 $955,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $615,000. Collections from customers during the year totaled $865,000. Payments to suppliers on account during the year, $515,000; payments to employees for salaries and wages, $322,000.

Required: 1. Prepare a T-account for each account on the company’s balance sheet and enter the beginning balances.

2. Record the transactions directly into the T-accounts. Key your entries to the letters (a) through (m) above.

3. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year? By how much?

4. Prepare a schedule of cost of goods manufactured.

5. Prepare a schedule of cost of goods sold.

6. Prepare an income statement for the year.

Answer 1

1 & 2.		Cash					Accounts receivable
	Ref.	Debit	Credit	Ref.		Ref.	Debit	Credit	Ref.
	Bal.	78000	515000	m		Bal.	117000	865000	l.
	l.	865000	322000	m		k.	955000
		943000	837000				1072000	865000
	Bal.	106000				Bal.	207000
		Raw materials					Videos in process
	Ref.	Debit	Credit	Ref.		Ref.	Debit	Credit	Ref.
	Bal.	45000	215000	b.		Bal.	23000	565000	j.
	a.	200000				b.	172000
		245000	215000				(215000*80%)
	Bal.	30000				f.	97000
						i.	351000
							643000	565000
						Bal.	78000
	Finished videos awaiting sale						Prepaid insurance
	Ref.	Debit	Credit	Ref.		Ref.	Debit	Credit	Ref.
	Bal.	96000	615000	k.		Bal.	12000	8500	g.
	j.	565000					12000	8500
		661000	615000			Bal.	3500
	Bal.	46000
		Studio and equipment					Accumulated depreciation
	Ref.	Debit	Credit	Ref.		Ref.	Debit	Credit	Ref.
	Bal.	760000						225000	Bal.
		760000	0					99000	d.
	Bal.	760000					0	324000
								324000	Bal.
		Accounts payable					Capital stock
	Ref.	Debit	Credit	Ref.
	m.	515000	117000	Bal.				504000	Bal.
			200000	a.			0	504000
			87000	c.				504000	Bal.
			145000	e.
			10100	h.
		515000	559100
			44100	Bal.
		Retained earnings					Manufacturing overhead
	Ref.	Debit	Credit	Ref.		Ref.	Debit	Credit	Ref.
			285000	Bal.		b.	43000	351000	i.
			78400	Refer 6			(215000*20%)
		0	363400	363400		c.	87000
				Bal.		d.	74250
							(99000*3/4)
						f.	125000
						g.	6375
							(8500*75%)
						Refer 3	15375
							351000	351000