Chapter 3, Problem 1PSA

1.

(a)

To determine

To compute: Cost of transferred products form production to finished products.

Explanation of Solution

Given,
Opening work in process inventory is $435,000.
Production cost incurred during the month is $1,834,500.
Closing work in process inventory is $515,000.

Formula for calculation of cost of completed and transferred goods,

$\left[\begin{array}{l}\text{Cost}\text{of}\text{Completed}\text{and}\\ \text{Transferred}\text{Goods}\end{array}\right]=\left[\begin{array}{l}\text{Opening}\text{Work}\text{in}\text{Process}\text{Inventory}\\ +\text{Cost}\text{Incurred}\text{During}\text{the}\text{Month}\\ -\text{Closing}\text{Work}\text{in}\text{Process}\text{Inventory}\end{array}\right]$

Substitute, $435,000 foropening work in process inventory, $1,834,500 for Production cost incurred during the month, and $515,000 forclosing work in process inventory.

$\begin{array}{c}\text{Cost}\text{of}\text{Completed}\text{and}\text{Transferred}\text{Goods}=\$435,000+\$1,834,500-\$515,000\\ =\$1,754,500\end{array}$

Hence, cost of completed and transferred goods is $1,754,500.

Working note:

Calculation forproduction cost incurred during the month,

$\begin{array}{c}\text{Sewing cost incurred during the month}=\left(\begin{array}{l}\text{Material}\text{cost}+\text{Labor}\text{cost}\\ +\text{Overhead}\text{cost}\end{array}\right)\\ =\$157,500+\$780,000+\$897,000\\ =\$1,834,500\end{array}$

(b)

To determine

To compute: Cost of goods sold.

Explanation of Solution

Given,
Opening finished goods inventory is $633,000.
Completed and transferred goods is $1,754,500
Closing finished goods inventory is $605,000.

Formula for calculation of cost of goods sold,

$\text{Cost}\text{of}\text{Goods}\text{Sold}=\left(\begin{array}{l}\text{Opening}\text{Finished}\text{Goods}\text{Inventory}\\ +\text{Completed}\text{and}\text{Transferred}\text{goods}\\ -\text{Closing}\text{Finished}\text{Goods}\text{Inventory}\end{array}\right)$

Substitute, $633,000 foropening finished goods inventory, $1,754,500for completed and transferred goodsand $605,000 forclosing finished goods inventory.

$\begin{array}{c}\text{Cost}\text{of}\text{Goods}\text{Sold}=\$633,000+\$1,754,500-\$605,000\\ =\$1,782,500\end{array}$

Hence, cost of goods sold is $1,782,500.

2.

To determine

To prepare: Journal entry.

Explanation of Solution

(a)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Raw Material Inventory		250,000
	Accounts Payable			250,000
	(Beingraw 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.

(b)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Work in Process		157,500
	Raw Material Inventory			157,500
	(Beingraw 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.

(c)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Factory Overhead		60,000
	Raw Material Inventory			60,000
	(Beingraw 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.

(d)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Work in Process		780,000
	Factory Wages Payable			780,000
	(Beingdirect 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

(e)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Factory Overhead		750,000
	Factory Wages Payable			750,000
	(Beingindirect 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

(f)

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

Table6)

• 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.

(g)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Factory Overhead		87,000
	Other Accounts			87,000
	(Beingother 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.

(h)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Work in Process		897,000
	Factory overhead			897,000
	(Beingfactory 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.

(i)

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

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.

(j)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Accounts receivable		2,500,000
	Sales Revenue			2,500,000
	(Beinggoods soldon 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
	(Beingcost 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, credit finished goods inventory account.