Chapter 19, Problem 2AP

1.

To determine

Prepare the journal entries to assign the following costs:

1. a. Direct materials costs to work in process inventory.
2. b. Direct labor costs to work in process inventory.
3. c. Overhead costs to work in process inventory.
4. d. Indirect materials cost to the factory overhead account.
5. e. Indirect labor costs to the factory overhead account.

Explanation of Solution

Job order costing:

Job order costing is one of the methods of cost accounting under which cost is collected and gathered for each job, work order, or project separately. It is a system by which a factory maintains a separate record of each particular quantity of product that passes through the factory. Job order costing is used when the products produced are significantly different from each other.

a. Prepare the journal entry to assign the direct materials to work in process inventory:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Work in process inventory	28,800
	Raw materials inventory $\left(\$10,200+\$18,600\right)$		28,800
	(To record the direct materials costs for Job 402 and Job 404)

Table (1)

• Work in process inventory is an asset account and it is increased. Therefore, debit work in process inventory with $28,800.
• Raw materials inventory is an asset account and it is decreased. Therefore, credit raw materials inventory with $28,800.

b. Prepare the journal entry to assign the direct labors to work in process inventory:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Work in process inventory	59,800
	Wages payable $\left(\$36,000+\$23,800\right)$		59,800
	(To record the direct labor costs for Job 402 and Job 404)

Table (2)

• Work in process inventory is an asset account and it is increased. Therefore, debit work in process inventory with $59,800.
• Wages payable is a liability account and it is increased. Therefore, credit wages payable with $59,800.

c. Prepare the journal entry to assign the overhead costs to work in process inventory:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Work in process inventory	119,600
	Factory overhead $\left(\$59,800\times 200\%\right)$		119,600
	(To record the allocation of overhead costs for Job 402 and Job 404)

Table (3)

• Work in process inventory is an asset account and it is increased. Therefore, debit work in process inventory with $119,600.
• Factory overhead is an expense account and it is decreased. Therefore, credit factory overhead with $119,600.

d. Prepare the journal entry to assign the indirect materials to factory overhead account:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Factory overhead	5,600
	Raw materials inventory		5,600
	(To record the indirect materials costs)

Table (4)

• Factory overhead is an expense account and it is increased. Therefore, debit credit factory overhead with $5,600.
• Raw materials inventory is an asset account and it is decreased. Therefore, credit raw materials inventory with $5,600.

e. Prepare the journal entry to assign the indirect labor costs to factory overhead account:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Factory overhead account	8,200
	Wages payable		8,200
	(To record the indirect labor costs)

Table (5)

• Factory overhead account is an expense account and it is increased. Therefore, debit factory overhead with 8,200.
• Wages payable is a liability account and it is increased. Therefore, credit wages payable with $8,200.

2.

To determine

Determine the revised balance of factory overhead account, identify whether it is under or over applied for the year and prepare the adjusting entry to allocate it to cost of goods sold.

Explanation of Solution

Determine the revised balance of factory overhead account:

Particulars	Amount ($)
Ending balance from trial balance	$115,000	Debit
Applied to Jobs 402 and 404	(119,600)	Credit
Additional indirect materials	5,600	Debit
Additional indirect labor	8,200	Debit
Under applied overhead	$9,200	Debit

Table (6)

Thus, the revised balance of factory overhead account is $9,200 and it is under applied.

Prepare the adjusting entry to allocate the under applied overhead to cost of goods sold:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Cost of goods sold	9,200
	Factory overhead		9,200
	(To close the under applied overhead)

Table (7)

• Cost of goods sold account is an expense account and it is increased. Therefore, debit cost of goods sold with $9,200.
• Factory overhead is an expense account and it is decreased. Therefore, credit factory overhead with $9,200.

3.

To determine

Prepare the revised trial balance.

Explanation of Solution

Trial balance: Trial balance is a summary of all the ledger accounts balances presented in a tabular form with two column, debit and credit. It checks the mathematical accuracy of the ledger postings and helps preparing the final accounts.

Prepare a revised trial balance:

Company BB
Trial Balance
For the year ended 31st December 2015
Particulars	Debit ($)	Credit ($)
Cash	$170,000
Accounts receivable	$75,000
Raw materials inventory(1)	$45,600
Work in process inventory(2)	$208,200
Finished goods inventory	$15,000
Prepaid rent	$3,000
Accounts payable		$17,000
Wages payable		$68,000
Notes payable		$25,000
Common stock		$50,000
Retained earnings		$271,000
Sales		$373,000
Cost of goods sold $\left(\$218,000+\$9,200\right)$	$227,200
Factory overhead	$0
Operating expenses	$60,000	$0
Totals	$804,000	$804,000

Table (8)

Working note (1):

Calculate the amount of raw material inventory:

Particulars	Amount ($)
Balance per trial balance	$80,000
Less:  Amounts recorded for Jobs 402 and 404	($28,800)
Less:  Indirect materials	($5,600)
Ending balance	$45,600

Table (9)

Working note (2):

Calculate the amount of work in process inventory:

Particulars	Job 402	Job 404	Total
Direct materials	$10,200	$18,600	$28,800
Direct labor	$36,000	$23,800	$59,800
Overhead	$72,000	$47,600	$119,600
Total cost	$118,200	$90,000	$208,200

Table (10)

4.

To determine

Prepare an income statement and balance sheet as of December 31, 2015.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare an income statement for the year ended December 31, 2015:

Company BB
Income Statement
For Year Ended December 31, 2015
Particulars	Amount ($)	Amount ($)
Sales	$373,000
Less: Cost of goods sold	($227,200)
Gross profit	$145,800
Less: Operating expenses	($60,000)
Net income		$85,800

Table (11)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare a balance sheet as of December 31, 2015:

Company BB
Balance sheet
As on December 31, 2015
Particulars	Amount ($)	Amount ($)
Assets
Cash		$170,000
Accounts receivable		$75,000
Inventories
Raw materials inventory	$45,600
Work in process inventory	$208,200
Finished goods inventory	$15,000	$268,800
Prepaid rent		$3,000
Total assets		$516,800
Liabilities and equity
Accounts payable	$17,000
Wages payable	$68,000
Notes payable		$25,000
Total liabilities		$110,000
Common stock	$50,000
Retained earnings $\left(\$271,000+\$85,800\right)$	$356,800
Total stockholders' equity		$406,800
Total liabilities and equity		$516,800

Table (12)

5.

To determine

Describe the impact of the error on the income statement for the year 2015 and the balance sheet at December 31, 2015.

Explanation of Solution

Impact of the error:

Cost for the Job 404 would be understated by $5,600 as the Job 404 is in work in process. Thus, the work in process inventory and total assets would be understated in the balance sheet. Then the over or under applied overhead would change by $5,600. If the overhead is under applied by $9,200 then this would decrease by $5,600 if the error is rectified. As the under applied overhead charged directly to cost of goods sold and this would decrease the cost of goods sold by $5,600 and increase the net income by $5,600.