
Concept explainers
1.
Prepare
1.

Explanation of Solution
Prepare journal entries.
Date | Account title and explanation | Post. Ref. | Amount $ | |
Debit | Credit | |||
July | ||||
a. | Raw Materials Inventory | 125,000 | ||
Cash | 125,000 | |||
(To record the purchase of raw materials for cash.) | ||||
b. | Work in Process Inventory | 52,440 | ||
Factory | 10,000 | |||
Raw Materials Inventory | 62,440 | |||
(To record the use of direct and indirect raw materials.) | ||||
c. | Work in Process Inventory | 202,250 | ||
Factory Overhead | 25,000 | |||
Factory Payroll Payable | 227,250 | |||
(To record the direct and indirect labor.) | ||||
d. | Factory Payroll Payable | 227,250 | ||
Cash | 227,250 | |||
(To record the payment of factory payroll with cash.) | ||||
e. | Factory Overhead | 80,000 | ||
Cash | 80,000 | |||
(To record the payment of other overhead with cash.) | ||||
f. | Work in Process Inventory | 101,125 | ||
Factory Overhead | 101,125 | |||
(To record the allocated overhead at 50% of direct labor.) |
Table (1)
a. To record the purchase of raw materials for cash:
- Work in process inventory is a current asset account and it is increased by $125,000. Thus it, is debited.
- Cash is a current asset account and it is decreased by $125,000. Thus it, is credited.
.
b. To record the use of direct and indirect raw materials:
- Work in process inventory is a current asset, and it is increased. Therefore, debit work in process inventory account for $52,440.
- Factory overhead is an expense account, and it is increased. Thus it, is debited with $10,000.
- Raw materials inventory is an asset account and it is decreased by $120,000. Thus it, is credited with $62,440.
c. To record the direct and indirect labor:
- Work in process inventory is a current asset, and it is increased. Therefore, debit work in process inventory account for $202,250.
- Factory overhead is an expense account, and it is decreased by $25,000. Thus it, is debited.
- Factory payroll payable is a liability account and it is increased by $227,250. Thus it, is credited.
d. To record the payment of factory payroll with cash:
- Factory payroll payable is a liability account and it is decreased by $227,250. Thus it, is debited.
- Cash is an asset account and it is decreased by $227,250. Thus it, is credited.
e. To record the payment of other overhead with cash:
- Factory overhead is a component of
stockholders’ equity , and it is decreased by $80,000. Thus it, is debited. - Cash is an asset account and it is decreased by $80,000. Thus it, is credited.
f. To record the allocated overhead at 50% of direct labor:
- Work in process inventory is a current asset, and it is increased. Therefore, debit work in process inventory account for $101,125 (Refer working note 1).
- Factory overhead is a component of stockholders’ equity, and it is increased. Therefore, credit factory overhead account for $101,125 (Refer working note 1).
Working note:
(1) Determine the amount of factory overhead allocated.
Given, the Allocated factory overhead production at 50$ of direct labor costs.
2.
Prepare a process cost summary.
2.

Explanation of Solution
Process cost summary: Process cost summary is prepared separately for each production department or for each process. A process cost summary describes the costs charged to each department, determines the costs assigned to each department outputs and reports the equivalent units of production achieved by each department. It is also known as production report.
Prepare process cost summary for Company ML using weighted average method.
Company ML | ||
Process Cost Summary – Weighted average method | ||
For Month Ended July 31 | ||
Costs Charged to Production | ||
Particulars | Amount | Amount |
Costs of beginning work in process | ||
Direct material | $2,660 | |
Conversion | $5,475 | $8,135 |
Costs incurred this period | ||
Direct materials | $52,440 | |
Conversion | $303,375 | $355,815 |
Total costs to account for | $363,950 | |
Unit cost information | (In Units) | |
Units to account for | ||
Beginning work in process | 5,000 | |
Units started this period | 14,000 | |
Total units to account for | 19,000 | |
Units accounted for | ||
Completed & transferred out | 11,000 | |
Ending work in process | 8,000 | |
Total units accounted for | 19,000 | |
Equivalent units of production | Direct Materials (EUP) | Conversion (EUP) |
Units completed and transferred out | 11,000 | 11,000 |
Ending work in process | 8,000 | 3,200 |
Equivalent units of production | 19,000 | 14,200 |
Cost per EUP | Direct Materials | Conversion |
Cost of beginning work in process | $2,660 | $5,475 |
Cost incurred during this period | $52,440 | $303,375 |
Total cost (A) | $55,100 | $308,850 |
Equivalent units of production (B) | 19,000 | 14,200 |
Cost per EUP (C) | $2.90 per EUP | $21.75 per EUP |
Cost assignment and reconciliation | ||
Particulars | Amount | Amount |
Cost transferred out | ||
Direct materials | $31,900 | |
Conversion | $239,250 | $271,150 |
Costs of ending work in process | ||
Direct materials | $23,200 | |
Conversion | $69,600 | $92,800 |
Total costs accounted for | $363,950 |
Table (2)
3.
Prepare journal entries using the calculations made in requirement 2.
3.

Explanation of Solution
Process Costing: Process costing is method of cost accounting in which all the costs that are incurred production process are recorded. Output of one process becomes input for next process. This method is used to apply cot to similar products that are mass-produced in uninterrupted manner.
Prepare journal entries.
Date | Account title and explanation | Post. Ref. | Amount $ | |
Debit | Credit | |||
July | ||||
g. | Finished goods Inventory | 271,150 | ||
Work in Process Inventory | 271,150 | |||
(To record the transfer of finished goods.) | ||||
h. | Cash | 625,000 | ||
Sales revenue | 625,000 | |||
(To record the cash sales.) | ||||
Cost of goods sold | 265,700 | |||
Raw Materials Inventory | 265,700 | |||
(To record the cost of goods sold.) |
Table (3)
g. To record the transfer of finished goods:
- Finished goods inventory is an asset account. Transfer of units to finished goods inventory from production increases the asset account by $271,150. Thus it, is debited.
- Work in process inventory is an asset account. Transfer of units from production to finished goods inventory decreases the asset account by $271,150. Thus it, is credited.
h. To record the sale of goods:
- Cash is a current asset account and it is increased by $625,000. Thus it, is debited.
- Sales revenue is a component of stockholders’ equity, and it is increased. Therefore, credit sales revenue account for $625,000.
To record the cost of goods sold:
- Cost of goods sold is a component of stockholders’ equity, and it is decreased. Therefore, it is debited with $265,700.
- Finished goods inventory is an asset account. Sale of finished goods decreases the asset account with $265,700. Thus it, is credited.
4.
4.

Explanation of Solution
General ledger: General ledger is a record of all accounts of assets, liabilities, and stockholders’ equity, necessary to prepare financial statements.
Prepare ledger accounts and post the transactions.
Raw Materials Inventory | Acct. No. 132 | |||
Date | Debit | Credit | Balance | |
June 30 | Balance | $25,000 | ||
(a) | Purchases | $125,000 | $150,000 | |
(b) | Usage | $62,440 | $87,560 |
Table (4)
Work in Process Inventory | Acct. No. 133 | |||
Date | Debit | Credit | Balance | |
June 30 | Balance | $8,135 | ||
(b) | Direct materials | 52,440 | $60,575 | |
(c) | Direct labor | $202,250 | $262,825 | |
(f) | Overhead allocation | $101,125 | $363,950 | |
(g) | Transfer to Finished Goods | $271,150 | $92,800 |
Table (5)
Finished Goods Inventory | Acct. No. 135 | |||
Date | Debit | Credit | Balance | |
June 30 | Balance | $110,000 | ||
(g) | Transfer in from production | $271,150 | $381,150 | |
(h) | July sales | $265,700 | $115,450 |
Table (6)
Factory Payroll Payable | Acct. No. 212 | |||
Date | Debit | Credit | Balance | |
(c) | Direct labor | $202,500 | $202,500 | |
(c) | Indirect labor | $25,000 | $227,250 | |
(d) | Payment | $227,250 | $0 |
Table (7)
Sales | Acct. No. 413 | |||
Date | Debit | Credit | Balance | |
(h) | July sales | $625,000 | $625,000 |
Table (8)
Cost of Goods Sold | Acct. No. 502 | |||
Date | Debit | Credit | Balance | |
(h) | July sales | $265,700 | $265,700 |
Table (9)
Factory Overhead | Acct. No. 540 | |||
Date | Debit | Credit | Balance | |
(b) | Indirect materials | $10,000 | $10,000 | |
(c) | Indirect labor | $25,000 | $35,000 | |
(e) | Other overhead costs | $80,000 | $115,000 | |
(f) | Overhead application (Refer Working Note 1) | $101,125 | $13,875 |
Table (10)
5.
Compute the amount of gross profit from the sales in July.
5.

Explanation of Solution
Gross margin (gross profit): Gross margin is the amount of revenue earned from goods sold over the costs incurred for the goods sold.
Compute the amount of gross profit from the sales in July.
Computation of gross margin | |
Particulars | Amount |
Sales | $625,000 |
Less: Cost of goods sold (Refer Working Note 2) | ($279,575) |
Gross profit | $345,425 |
Table (11)
Working note:
(2) Determine the cost of goods sold:
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Chapter 20 Solutions
Principles of Financial Accounting, Chapters 1-17 - With Access (Looseleaf)
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