Perez Manufacturing Company was started when it acquired $93,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $73,500. PMC also incurred $63,700 of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, they made 4,900 units of product and sold 4,100 units at a price of $36.00 each. All transactions were cash transactions 1. Prepare a GAAP-based income statement and balance sheet under option 1 2. Prepare a GAAP-based income statement and balance sheet under option 2

Perez Manufacturing Company was started when it acquired $93,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $73,500. PMC also incurred $63,700 of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, they made 4,900 units of product and sold 4,100 units at a price of $36.00 each. All transactions were cash transactions 1. Prepare a GAAP-based income statement and balance sheet under option 1 2. Prepare a GAAP-based income statement and balance sheet under option 2

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Concept explainers

Contract Costing

Contract costing is about tracing particular costs related to a particular contract entered into with the customer. It is one of the forms of job order costing. It is useful in long-term contracts at the most. It is seen that substantial time is required for the completion of the contract which takes different accounting periods. Thus, it is very much helpful for recognizing the costs associated with it and accounting in their specific accounting periods.

Question

Perez Manufacturing Company was started when it acquired $93,000 by issuing common stock. During the first year of operations, the company incurred specifically
identifiable product costs (materials, labor, and overhead) amounting to $73,500. PMC also incurred $63,700 of engineering design and planning costs. There was a debate
regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative
costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, they made 4,900 units of product and
sold 4,100 units at a price of $36.00 each. All transactions were cash transactions
1. Prepare a GAAP-based income statement and balance sheet under option 1
2. Prepare a GAAP-based income statement and balance sheet under option 2

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