Chapter 2, Problem 2PSA

To determine

Overhead:

Overheads are the cost and the expenses a company incurs of the production of a particular goods or services which are not directly related to the production. It does not include labor and direct material.

Direct Material Cost:

Direct material cost is the cost that a company incurs while manufacturing a certain product or service. It includes all the cost and expenses that are directly associated with the production such as raw materials.

Direct Labor Cost:

Direct labor cost is the cost that a company incurs in giving wages to the people that are directly associated with the production work.

Journal Entries:

Journal entries are the entries that are made in the books of accounts to record every transaction that happens in the business in the chronological order.

Accounting rules for journal entries:

• To Increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
• To Decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

Adjusted Trial Balance:

It is a statement which contain balances of all account after all the adjusting entries has been made.

Income Statement:

It is a financial statement which show the profit and loss made by the firm in a particular accounting period.

Balance sheet:

It shows the financial position of a firm. It consists of asset and liabilities.

1.

To Prepare: Journal Entries.

Explanation of Solution

a

Assign direct materials cost to work in process inventory.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work in Process inventory		28,800
	Raw materials inventory			28,800
	(To record raw materials assign to job)
Table (1)

• Work in process inventory is an asset account. The account increases as the raw materials are used in work in process that increases the balance of the work in process inventory account, hence it is debited.
• Raw materials inventory is an asset account. The account decreases as the raw materials are used in the work in process.

Working notes:

Given,
Direct materials to job 402 are $10,200.
Direct materials to job 404 are $18,600.

Computation of total direct materials,
$\begin{array}{c}\text{Total}\text{Direct}\text{Materials}=\left(\begin{array}{l}\text{Direct materials to job }402\\ +\text{Direct materials to job }404\end{array}\right)\\ =\$10,200+\$18,600\\ =\$28,800\end{array}$

Total direct materials are $28,800.

b.

To record the entry to assign direct labor cost to work in process inventory.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work in Process inventory		59,800
	Factory Wage Payable			59,800
	(To record cost of direct labor to job)
Table (2)

• Work in process inventory is an asset account. The account increases as the direct labor has been used in work in process inventory that increases the asset, hence it is debited.
• Factory wage payable is an expense account. The account decreases as the expenses of direct labor are transferred to work in process inventory, hence it is credited.

Working notes:

Given,
Direct labor assigned to job 402 is $36,000.
Direct labor assigned to job 404 is $23,800.

Computation of total direct labor,

$\begin{array}{c}\text{Total}\text{Direct}\text{Labor}=\left(\begin{array}{l}\text{Direct labor assigned to job }402\\ +\text{Direct labor assigned to job }404\end{array}\right)\\ =\$36,000+\$23,800\\ =\$59,800\end{array}$

Hence, the total direct labor is $59,800.

c.

To Record overhead applied.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work In Process		119,600
	Overhead			119,600
	(To assign cost of overhead to job)
Table (3)

• Work in process is an asset account. The account increases as the overhead is assigned to job as this increase the work in process, hence it is debited.
• Overhead is an expense account. The Account decreases as the overhead is assigned and transferred to work in process, hence it is credited.

Working notes:

Given,
Overhead rate is 200%.

Formula to calculate the applied overhead,

$\text{Applied}\text{Overhead}=\text{Direct}\text{Labor}\text{Cost}\times \text{Overhead}\text{Rate}$

Substitute $59,800 for direct labor cost and 200% for overhead rate.

$$ $\begin{array}{c}\text{Applied}\text{Overhead}=\$59,800\times 200\%\\ =\$119,600\end{array}$

Hence, applied overhead is $119,600.

d.

To record indirect material costing $5,600.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead account		5,600
	Inventory-raw material			5,600
	(To record the overhead cost)
Table (4)

• Factory overhead is an expense account. Factory overhead increases as there is an indirect expense and all the expenses are debited.
• Inventory raw materials are an asset account. Inventory decreases as the expense is not directly related to the production and all the assets are credited as their value decreases.

e.

To record indirect labor.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead		8,200
	Factory Wages Payable			8,200
	(To record the overhead cost)
Table (5)

• Factory overhead is an expense account. Factory overhead increases as there is an indirect labor and all the expenses are debited.
• Factory Wages payable is an expense account. The account decreases as the balance of the indirect labor is transferred to factory overhead, hence it is credited.

2.

To determine

To prepare: T account for factory overhead and journal entry.

Explanation of Solution

Factory Overhead
Date	Particular	Debit ($)	Date	Particular	Credit ($)
	Balance b/f	115,000		Work in process inventory	119,600
	Raw materials inventory	5,600		Balance c/f	9,200
	Factory Wages Payable	8,200
		128,800			128,800
Table (6)

Hence, the under applied overhead and the balance figure is $9,200

Under applied overhead

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead		9,200
	Cost of goods sold			9,200
	(To record under applied overhead)
Table (7)

• Factory overhead is an expense account. The account increases as the balance of over applied overhead has been transferred to factory overhead, hence it is debited.
• Cost of goods sold is an expense account. The account decreases as over applied goods is reduced from cost of goods sold that decreases the balance of cogs account. Hence, it is credited.

3.

To determine

To Prepare: Trial balance.

Explanation of Solution

Computation of the trial balance,

Adjusted Trial Balance
Particulars	Debit ($)	Credit ($)
Cash	170,000
Accounts Receivable	75,000
Raw materials inventory	45,600
Work in Process inventory	208,200
Finished goods inventory	15,000
Prepaid Rent	3,000
Factories Wage Payable		68,000
Accounts Payable		17,000
Notes Payable		15,000
Common Stock		50,000
Retained Earnings		271,000
Sales		373,000
Cost of goods sold	227,200
Operating Expense	60,000
Total	804,000	804,000
Table (8)

Hence, the trial balance total is $804,000.

4.

To determine

To prepare: The income statement.

Explanation of Solution

Computation of the income statement,

B System
Statement of Income
For the year ended on December 31, 2017
Details	Amount ($)
Sales revenue	373,000
Less: Cost of goods sold	(227,200)
Gross income	145,800
Less: Operating expense	(60,000)
Net income	85,800
Table (9)

Hence, the net income is $85,800.

5.

To determine

To prepare: Balance sheet.

Explanation of Solution

Computation of the balance sheet,

BB System
Balance Sheet
December 31, 2017
Details	Amount ($)	Amount ($)
Current Assets:
Cash	170,000
Accounts receivable	75,000
Raw material inventory	45,600
Work in process inventory	208,200
Finished goods inventory	15,000
Prepaid rent	3,000
Total assets		516,800
Liabilities and equity
Liabilities
Factory wages payable	68,000
Accounts payable	17,000
Notes payable	25,000
Total liabilities		110,000
Equity
Common stock	50,000
Retained earnings	356,800
Total equity		406,800
Total liabilities and equity		516,800
Table (10)

Working note:

Given,
Retained earnings in beginning are $271,000.

Computation of total retained earnings,

$\begin{array}{c}\text{Total}\text{Retained}\text{Earnings}=\text{Retained}\text{Earnings}\text{at}\text{the}\text{beginning}+\text{Net}\text{Income}\\ =\$271,000+\$85,800\\ =\$356,800\end{array}$

Hence, the total retained earnings are $356,800.

5

To determine

To Explain: The impact of error on the income statement and the balance sheet at December 31, 2017.

Explanation of Solution

Impact on income statement,

• If the indirect materials of $5,600 would be treated as the direct materials then it would be deducted from the cost of goods sold in the income statement and net come will decrease.
Impact on balance sheet,

• If the indirect materials of $5,600 would be treated as the direct materials, then the retained earnings would have decreased.

Hence, the treatment of indirect materials as direct materials would have a huge impact on income statement and balance sheet.