Chapter 3, Problem 1PA

Entries for process cost system

Port Ormond Carpet Company manufactures carpets. Fiber is placed in process in the Spinning Department, where it U spun into yarn. The output of the Spinning Department is transferred to the Tufting Department, where carpet backing is added at I he beginning of the process and the process is completed. On January 1, Port Ormond Carpet Company had the following inventories:

Departmental accounts are maintained for factory overhead, and both have zero balances on January 1.

Manufacturing operations for January are summarized as follows:

Instructions

1. 1. Journalize the entries to record the operations, identifying each entry by letter.
2. 2. Compute the January 31 balances of the inventory accounts.
3. 3. Compute the January 31 balances of the factory overhead accounts.

To determine

Prepare the journal entry to record each transaction of Company POC.

Explanation of Solution

Work in process costs

It is the cost of production process that is used to manufacture partly completed products. It comprises the cost of raw materials, labor, and overhead that incurred for the production process of the products at various phases.

Direct materials cost

Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.

Conversion cost

Cost of changing the materials into a finished product. It includes direct labor costs and factory overhead costs.

 (A) Prepare the journal entry to record material purchased on account of Company POC as shown below:

Account title and Explanation	Debit	Credit
Materials	$500,000
Accounts payable		$500,000
(To record material purchased on account)

Table (1)

• • Materials inventory is a current asset and increased. Therefore, debit material account for $500,000.
• • Accounts payable is a current liability and increased. Therefore, credit accounts payable account for $500,000.

(B) Prepare the journal entry to record material requisition used for production of Company POC as shown below:

Account title and Explanation	Debit	Credit
Work in process - Spinning Department	$275,000
Work in process - Tufting Department	$110,000
Factory overhead - Spinning Department	$46,000
Factory overhead - Tufting Department	$39,500
Materials		$470,500
(To record materials used in production)

Table (2)

• • Work in process inventory – spinning department is a current asset account, and increased. Therefore, debit work in process – spinning department account for $275,000.
• • Work in process inventory – tufting department is a current asset account, and increased. Therefore, debit work in process – spinning department account for $110,000.
• • Factory overhead – spinning department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – spinning department account for $46,000.
• • Factory overhead – tufting department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – tufting department account for $46,000.
• • Materials inventory is a current asset, and decreased it. Therefore, credit material account for $470,500.

(C) Prepare the journal entry to record labor used for production of Company POC as shown below:

Account title and Explanation	Debit	Credit
Work in process - Spinning Department	$185,000
Work in process - Tufting Department	$98,000
Factory overhead - Spinning Department	$18,500
Factory overhead - Tufting Department	$9,000
Wages payable		$310,500
(To record labor cost incurred for production)

Table (3)

• • Work in process inventory – spinning department is a current asset account, and increased. Therefore, debit work in process – spinning department account for $185,000.
• • Work in process inventory – tufting department is a current asset account, and increased. Therefore, debit work in process – spinning department account for $98,000.
• • Factory overhead – spinning department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – spinning department account for $18,500.
• • Factory overhead – tufting department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – tufting department account for $9,000.
• • Wages payable is a current liability, and increased. Therefore, credit wages payable account for $310,500.

(D) Prepare the journal entry to record accumulated depreciation on fixed asset of Company POC as shown below:

Account title and Explanation	Debit	Credit
Factory Overhead - Spinning Department	$12,500
Factory Overhead - Tufting Department	$8,500
Accumulated depreciation – Fixed asset		$21,000
(To record accumulated depreciation for fixed asset)

Table (4)

• • Factory overhead – spinning department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – spinning department account for $12,500.
• • Factory overhead – tufting department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – tufting department account for $8,500.
• • Accumulated depreciation – fixed asset is a contra asset, and increased. Therefore, credit accumulated depreciation – fixed asset account for $21,000.

(E) Prepare the journal entry to record expired factory insurance of Company POC as shown below:

Account title and Explanation	Debit	Credit
Factory Overhead - Spinning Department	$2,000
Factory Overhead - Tufting Department	$1,000
Prepaid insurance		$3,000
(To record expired prepaid factory insurance)

Table (5)

• • Factory overhead – spinning department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – spinning department account for $2,000.
• • Factory overhead – tufting department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – tufting department account for $1,000.
• • Prepaid insurance is a current asset, and decreased. Therefore, credit prepaid insurance account for $3,000.

(F) Prepare the journal entry to record applied factory overhead of Company POC as shown below:

Account title and Explanation	Debit	Credit
Work in process - Spinning Department	$80,000
Work in process - Tufting Department	$55,000
Factory overhead - Spinning Department		$80,000
Factory overhead - Tufting Department		$55,000
(To record allocation of factory overhead)

Table (6)

• • Work in process inventory – spinning department is a current asset account, and increased. Therefore, debit work in process – spinning department account for $80,000.
• • Work in process inventory – tufting department is a current asset account, and increased. Therefore, debit work in process – tufting department account for $55,000.
• • Factory overhead – spinning department is a component of stockholders’ equity, and increased it. Therefore, credit factory overhead – spinning department account for $80,000.
• • Factory overhead – tufting department is a component of stockholders’ equity, and decreased it. Therefore, credit factory overhead – tufting department account for $55,000.

(G) Prepare the journal entry to record production costs transferred from spinning department to tufting department of Company POC as shown below:

Account title and Explanation	Debit	Credit
Work in process - Tufting Department	$547,000
Work in process - Spinning Department		$547,000
(To record production costs transferred from spinning department to tufting department)

Table (7)

• • Work in process inventory – spinning department is a current asset account, and increased. Therefore, debit work in process – spinning department account for $547,000.
• • Work in process inventory – tufting department is a current asset account, and decreased. Therefore, credit work in process – tufting department account for $547,000.

(H) Prepare the journal entry to record production costs transferred from tufting department to finished goods of Company POC as shown below:

Account title and Explanation	Debit	Credit
Finished goods	$807,200
Work in process - Tufting Department		$807,200
(To record production costs transferred from tufting department to Finished goods)

Table (8)

• • Finished goods inventory is a current asset, and increased. Therefore, debit finished goods account for $807,200.
• • Work in process inventory – tufting department is a current asset, and decreased. Therefore, credit work in process – tufting department account for $807,200.

(I) Prepare the journal entry to record cost of goods sold during the period of Company POC as shown below:

Account title and Explanation	Debit	Credit
Cost of Goods sold	$795,200
Finished goods		$795,200
(To record cost of goods sold during the period)

Table (9)

• • Cost of goods sold is a component of stockholders’ equity, and increased it. Therefore, debit cost of goods sold account for $795,200.
• • Finished goods inventory is a current asset, and decreased. Therefore, credit finished goods account for $795,200.

To determine

Compute the ending balance of inventory accounts of Company POC.

Explanation of Solution

Calculate ending balance of inventory account of Company POC as shown below:

Particulars	Amount
	Materials	Work in Process - Spinning Department	Work in Process - Tufting Department	Finished Goods
Balance, January 1	$17,000	$35,000	$28,500	$62,000
Add: Debit balance	$500,000	$540,000	$810,000	$807,200
Less: Credit balance	$470,000	$547,000	$807,200	$795,200
Balance, January 31	$47,000	$28,000	$31,300	$74,000

Table (10)

Working notes:

Calculate debit balance for work in process – spinning department of Company POC as shown below:

  $\begin{array}{c}\begin{array}{l}\text{Debit balance for work in }\\ \text{process - spinning department}\end{array})\text{ =}\text{\$275,000}\text{+}\text{\$18,5000}\text{+}\text{\$80,000}\\ \text{=}\text{\$540,000}\end{array}$

Calculate debit balance for work in process – tufting department of Company POC as shown below:

$\begin{array}{c}\begin{array}{l}\text{Debit balance for work in }\\ \text{process - tufting department}\end{array})\text{ =}\text{\$110,000}\text{+\$98,000}\text{+\$55,000}\text{+\$547,000}\\ \text{=}\text{\$810,000}\end{array}$

Ending balance of inventory account is calculated by adding opening balance of inventory, debit balance and then deduct with credit balance. Hence, ending balance for materials is $47,000 (debit balance), ending balance for work in process – spinning department is $28,000 (debit balance), ending work in process - tufting department is $31,300 (debit balance), and ending balance for finished goods is $74,000 (debit balance).

To determine

Compute the ending balance of factory overhead accounts of Company POC.

Explanation of Solution

Calculate ending balance of factory overhead accounts of Company POC as shown below:

Particulars	Amount
	Factory Overhead - Spinning Department	Factory Overhead - Tufting Department
Balance, January 1	$0	$0
Add: Debit balance	$79,000	$58,000
Less: Credit balance	$80,000	$55,000
Balance, January 31	($1,000)	$3,000

Table (11)

Working notes:

Calculate debit balance for factory overhead– spinning department of Company POC as shown below:

  $\begin{array}{c}\begin{array}{l}\text{Debit balance for factory }\\ \text{overhead - spinning department}\end{array})\text{ =}\text{\$46,000}\text{+}\text{\$18,500}\text{+\$12,500}\text{+\$2,000}\\ \text{=}\text{\$79,000}\end{array}$

Calculate debit balance for factory overhead – tufting department of Company POC as shown below:

  $\begin{array}{c}\begin{array}{l}\text{Debit balance for factory }\\ \text{overhead - tufting department}\end{array})\text{ =}\text{\$39,500}\text{+\$9,000}\text{+\$8,500}+\$1,000\\ \text{=}\text{\$58,000}\end{array}$

Ending balance of factory overhead account is calculated by adding opening balance of factory overhead, debit balance and then deduct with credit balance. Hence, ending balance of factory overhead – spinning department is $1,000 (credit balance), and ending balance of factory overhead – tufting department is $3,000 (debit balance).