Chapter 3, Problem 3CP

1.

To determine

To prepare: Journal entry.

Explanation of Solution

(a)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Raw Material Inventory		125,000
	Accounts payable			125,000
	(Beingraw material inventory is purchased on credit )

Table(8)

• 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 ($)	Credit ($)
	Work in Process		52,440
	Factory Overhead		10,000
	Raw Material Inventory			62,440
	(Beingraw material directly and indirectly used in production)

Table(9)

• 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.
• 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.

(c)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work in Process		202,250
	Factory Overhead		25,000
	Factory Wages Payable			227,250
	(Beingdirect labor expenses incurred during production )

Table(10)

• Work in process is an asset. Since, labor is used to manufacture, it increases work in process. Hence, debit work in process account.
• 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

(d)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Wages Payable		227,250
	Cash			227,250
	(Beingfactory wages paid))

Table(11)

• 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.

(e)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead		80,000
	Cash			80,000
	(Beingfactory overhead paid in cash)

Table(12)

• Factory overhead is an expense. Since, expense reduces equity, debit factory overhead account.
• Cash is an asset. Since, cash is used to pay liability, it decreases asset. Hence, debit cash account.

(f)

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work in Process		101,125
	Factory overhead			101,125
	(Beingfactory overhead cost applied )

Table(13)

• 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.

2.

To determine

To prepare: Process cost summary.

Explanation of Solution

Prepare production cost summary:

M.L.B. Company-Production Department
Process Cost Summary (weighted average method)
For the month ended May 31, 20XX
Particulars			Amount ($)	Amount ($)
Cost charged to Production
Cost of work in process (beginning)
Direct materials			2,660
Conversion			5,475	8,135
Cost incurred this period
Direct materials			52,440
Conversion			303,375	355,815
Total cost				363,950
Unit Information	Units				Units
Units to account for:		Units accounted for
Work in process (beginning)	5,000	Completed and transferred units			11,000
Unit started this period	14,000	Work in process (ending)			8,000
Total units to account for	19,000	Total units accounted for			19,000
Equivalent Unit of Production			Direct Materials	Conversion
Completed and transferred units			11,000	11,000
Work in process (ending)			8,000	3,200
Equivalent Unit of Production			19,000	14,200
Cost per EUP
Cost of work in process (beginning)			2,660	5,475
Cost incurred this period			52,440	303,375
Total cost			$55,100	$308,850
Equivalent unit of production			19,000	14,200
Cost per EUP			$2.9	$21.75
Cost Assignment and Reconciliation			Amount ($)	Amount ($)
Cost of completed and transferred units
Direct materials			31,900
Conversion			239,250	271,150
Cost of work in process (ending)
Direct materials			23,200
Conversion			69,600	92,800
Total cost				363,950

Table(14)

Hence, total cost of transferred goods and work in process (ending) is $271,150 and $92,800 respectively.

Working notes:

Calculation for EUP (direct material),

$\begin{array}{c}\text{Cost}\text{per}\text{EUP}\text{(Direct}\text{Material)}=\frac{\text{Total}\text{Cost}}{\text{Equivalent}\text{Unit}\text{of}\text{Production}}\\ =\frac{\$55,100}{19,000}\\ =\$2.9\end{array}$

Calculation for EUP (Conversion),

$\begin{array}{c}\text{Cost}\text{per}\text{EUP}\text{(Conversion)}=\frac{\text{Total}\text{Cost}}{\text{Equivalent}\text{Unit}\text{of}\text{Production}}\\ =\frac{\$308,850}{14,200}\\ =\$21.75\end{array}$

3.

To determine

To prepare: Journal entry.

Explanation of Solution

g.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Finished Goods Inventory		271,150
	Work in Process			2,71,150
	(Being goods transferred from production to finished goodsdepartment )

Table(15)

• 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 production to finished goods department, it decreases work in process account. Hence, credit work in process account.

h.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cash		625,000
	Sales Revenue			625,000
	(Beinggoods soldon credit)

Table(16)

• Cash is an asset. Since, sales have taken place, but money is received. Hence, debit cash 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 ($)	Credit ($)
	Cost of Goods Sold		265,700
	Finished Goods Inventory			265,700
	(Beingcost of goods sold is recorded )

Table(17)

• 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.

4.

To determine

To prepare: Ledger account.

Explanation of Solution

Raw Material Inventory
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
July 1	Balance b/f		25,000		25,000
	Cash		125,000		150,000
	Work in process			52,440
	Factory overhead			10,000	87,560

Table(18)

The ending balance is $87,560.

Work in Process Inventory
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
July 1	Balance b/f
	Direct material		2,660
	Conversion		5,475		8,125
	Raw material inventory		52,440		60,565
	Factory wages payable		202,500		263,065
	Factory overhead		101,125		364,190
	Finished goods inventory			271,150	93,040

Table(19)

The ending balance is $93,040.

Finished Goods Inventory
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
July 1	Balance b/f		110,000		110,000
	Work in process		271,150		381,150
	Cost of goods sold			265,700	115,450

Table(20)

The ending balance is $115,450.

Sales
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
	Cash			625,000	625,000

Table(21)

The ending balance is $625,000.

Cost of Goods Sold
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
	Finished goods inventory		265,700		265,700

Table(22)

The ending balance is $265,700.

Factory Wages Payable
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
	Work in process			202,250	202,250
	Factory overhead			25,000	227,250
	Cash		227,250		0

Table(23)

The ending balance is $0.

Factory Overhead
Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)	Balance ($)
	Raw material inventory		10,000		10,000
	Factory wages payable		25,000		35,000
	Cash		80,000		80,000
	Work in process			101,125	23,875

Table(24)

The ending balance is $23,875.

5.

To determine

To compute: Gross profit.

Explanation of Solution

Given,
Sales are $625,000.
Costs of goods sold are $265,700.

Formula to calculate gross profit,

$\text{Gross}\text{profit}=\text{Sales}-\text{Cost}\text{of}\text{goods}\text{sold}$

Substitute $625,000 for sales and $265,700 for cost of goods sold in the above formula.

$\begin{array}{c}\text{Gross}\text{profit}=\text{\$625,000}-\$265,700\\ =\$359,300\end{array}$

Hence, gross profit of the firm is $359,300.