Chapter 3, Problem 1GLP

To determine

Work in Process Inventory Account:

Work in process inventory account is asset accounts which show the balances of all partial produced products.

Raw Material Inventory Account:

Raw material inventory account is an asset account which show the balance of all those material which are not yet used to make a final product or work in progress.

Journal Entries:

It is a book of original entry. It records and summarizes financial transaction of an entity in chronological manner, generally according to dual aspect of accounting.

Accounting rules regarding journal entries:

• Balance increase when: Assets, losses and expenses get debited and liabilities, gains, and revenue get credited.
• Balance decrease when: Assets, losses and expenses get credited and liabilities, gains, and revenue get debited.

To prepare: Journal entry for the flow of units manufactured through the manufacturing department, schedule of cost of goods manufactured and a partial income statement.

Explanation of Solution

Prepare journal entry.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Raw Material Inventory		250,000
	Accounts payable			250,000
	(Being raw material inventory is purchased on credit )

                                                    Table (1)

• Raw material inventory is an asset. Since, raw material inventory is purchased, it increases asset. Hence debit raw material inventory account
• Account payable is a liability. Since, asset is purchased but not paid yet it increases liability. Hence, credit accounts payable account.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Work in Process		157,500
	Raw Material Inventory			157,500
	(Being raw material directly used in production)

                                                    Table (2)

• Work in process is an asset. Since, material is used to manufacture good but not completed yet, it increases work in process. Hence, debit work in process account.
• Raw material inventory is an asset. Since, raw material is used, it decreases asset. Hence credit raw material inventory account.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Factory Overhead		60,000
	Raw Material Inventory			60,000
	(Being raw material indirectly used in production))

                                                    Table (3)

• Factory overhead is an expense. Since, raw material inventory is used, it increases expense. Hence, debit factory overhead.
• Raw material inventory is an asset. Since, raw material is used, it decreases asset. Hence credit raw material inventory account.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Work in Process		780,000
	Factory Wages Payable			780,000
	(Being direct labor expenses incurred during production )

                                                    Table (4)

• Work in process is an asset. Since, labor is used to manufacture, it increases work in process. Hence, debit work in process account.
• Factory wages payable is a liability. Since, expense is incurred and expense reduces equity. Hence, credit factory wages payable account

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Factory Overhead		750,000
	Factory Wages Payable			750,000
	(Being indirect labor expenses incurred during production )

                                                    Table (5)

• Factory overhead is an expense. Since, labor is used, it increases expense. Hence, debit factory overhead.
• Factory wages payable is a liability. Since, expense is incurred and expense reduces equity. Hence, credit factory wages payable account

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Factory Wages Payable		1,530,000
	Cash			1,530,000
	(Being factory wages paid))

                                                    Table (6)

• Factory wages payable is a liability. Since, liability is paid, it decreases liability. Hence, debit factory wages payable account
• Cash is an asset. Since, cash is used to pay liability, it decreases asset. Hence, debit cash account.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Factory Overhead		87,000
	Other Accounts			87,000
	(Being other indirect expenses incurred )

                                                    Table (7)

• Factory overhead is an expense. Since, other overhead cost are indirect, it increases expense. Hence, debit factory overhead.
• Other accounts are expense to the company. Since, expense reduces equity, other accounts is credited.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Work in Process		897,000
	Factory overhead			897,000
	(Being factory overhead cost applied )

                                                    Table (8)

• Work in process is an asset. Since, indirect labor is used to manufacture, it increases work in process. Hence, debit work in process-weaving account.
• Factory overhead is an expense. Since, factory overhead is transferred to work in process, it decreases factory overhead. Hence, credit factory overhead account.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Finished Goods Inventory		1,754,500
	Work in Process			1,754,500
	(Being goods transferred from sewing to finished goods department )

                                                    Table (9)

• Finished goods inventory is an asset. Since, finished goods inventory is increased, it increases asset. Hence, debit finished goods inventory account.
• Work in process is an asset. Since, goods is transferred from sewing to finished goods department, it decreases work in process account. Hence, credit work in process account.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Accounts receivable		2,500,000
	Sales Revenue			2,500,000
	(Being goods sold on credit)

                                                    Table (10)

• Accounts receivable is an asset. Since, sales have taken place, but money not received yet. Hence, debit account receivables account.
• Sales revenue is revenue for the company. Since, goods is sold, it increases revenue. Hence, credit sales revenue account.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Cost of Goods Sold		1,782,500
	Finished Goods Inventory			1,782,500
	(Being cost of goods sold is recorded )

                                                    Table (11)

• Cost of goods sold is an expense. Since, expense is increased it reduces equity. Hence, debit cost of goods sold account.
• Finished goods inventory is an asset. Since, finished goods inventory is increased, it increases asset. Hence, debit finished goods inventory account.

Prepare a schedule of cost of goods manufactured.

S Company
Schedule for cost of goods manufactured
For the month ended on May 31
Particulars	Cost ($)
Direct Materials Cost	157,500
Direct Labor Cost	780,000
Factor Overheads	897,000
Total Cost	1,834,500
Work in progress (beginning)	435,000
Total Cost	2,269,500
Less: Work in progress (ending)	515,000
Total goods manufactured	1,754,500

                                                                            Table (12)

Hence, the total cost of goods manufactured is $1,754,500.

Prepare partial income statement.

S. Company
Partial Income Statement
For month ended May 31, 20XX
Particulars	Amount ($)	Amount ($)
Revenue:
Sales Revenue	2,500,000
Total Revenue		2,500,000
Less:
Cost of goods sold	1,782,500
Total Expense		1,782,500
Gross profit		717,500

Hence, gross profit according to partial income statement is $717,500.