Chapter 3, Problem 5E

Requirement1:

To determine

The Journal entries to be passed for the transactions for manufacturing the product.

Answer to Problem 5E

Solution: The Journal entries for the transactions occurred for the month of October for Polaris Company is as follows:

IN THE BOOKS OF POLARIS COMPANY
FOR THEOCTOBER MONTH
S.NO.	ACCOUNTS TITLES AND EXPLANATIONS				DEBIT IN $	CREDIT IN $
a.	Raw Material Inventory Account Dr.				210,000
	Accounts Payable					210,000
	(For raw material purchased on account)
b.	Work in Process Inventory Account Dr.				178,000
	Manufacturing Overheads Account Dr.				12,000
	Raw Material Inventory Account					190,000
	(For issue of both direct anda indirect material to production)
c.	Work in Process Inventory Account Dr.				90,000
	Manufacturing Overheads Account Dr.				110,000
	Wages Payable					200,000
	(For direct and indirect wages accrued and incurred for production)
d.	Manufacturing Overheads Account Dr.				40,000
	Accumulated Depreciation-Equipment Account					40,000
	(For depreciation charged on factory Equipment)
e.	Manufacturing overheads Account Dr.				70,000
	Accrued manufacturing overheads Account					70,000
	(For manufacturing overhead incurred during the month)
f.	Work in Process Inventory Account Dr.				240,000
	Manufacturing overheads Account					240,000
	(For manufacturing overheads applied to work in process based on machine hours)
g.	Finished Goods Inventory Account Dr.				520,000
	Work in Process Inventory Account					520,000
	(For goods completed during the month)
h.	Cost of Goods sold account Dr.				480,000
	Finished Goods Inventory Account					480,000
	(for cost of goods sold transferred from finished goods)
	Accounts Receivable Account Dr.				600,000
	Sales Revenue Account					600,000
	(For sales made on account)

Explanation of Solution

The explanation for each journal entry shall be made as follows:

1. Raw material purchased increases the inventory balance and the liability.
2. Raw material used as direct and indirect material shall be debited to work in process and manufacturing overheads account.
3. Wages incurred shall be charged in work in process inventory for direct wages and in manufacturing overheads for indirect wages.
4. Depreciation charged on equipment shall be indirect expense debited to manufacturing overheads.
5. Overheads incurred during the period shall be debited to manufacturing overheads.
6. Manufacturing overheads are applied to work in process inventory on the basis of pre-determined overhead rate and actual machine hours worked. The amount is computed as follows:

Pre-determined Overhead rate: $ 8 per machine hour

Machine hours: 30,000 machine hours

Overheads Applied: Machine hours × Pre-determined overhead rate

= 30,000 hours × $ 8.00 per machine hour= $240,000

Cost of goods finished during the year shall be debited to finished goods as it will lead to increase in finished goods inventory.

Cost of goods which have been sold will credited to finished goods as it will decrease the inventory balance and increase the cost of goods sold. The sales made on account will increase the sales revenue. The sales revenue shall be computed as under:

Cost of Goods sold: $480,000

Profit Margin =25% of cost

Gross margin= $480,000 × 25% = $120,000

Sales Revenue = Cost of Goods sold + Gross Margin = $480,000+$120,000 = $600,000

Requirement2:

To determine

The T-Accounts shall be made for manufacturing overheads and work in process account.

Answer to Problem 5E

Solution: The T-accounts are presented as follows:

MANUFACTURING OVERHEADS
Raw material Inv.		12,000	Work in process		240,000
Wages Payable		110,000
Accumulated Depreciation		40,000
Accrued Overheads		70,000
			Ending balance		8,000
WORK IN PROCESS INVENTORY
Beginning Balance		42,000	Finished Goods Inventory		520,000
Raw material Inv.		178,000
Wages Payable		90,000
Manufacturing Overheads		240,000
Ending Balance		30,000

Explanation of Solution

• The Manufacturing overheads accounts is prepared by debiting the indirect cost actually incurred during the period and credited with the amount of overheads applied during the period.
• Work in process accounts shall be prepared by debiting the direct cost incurred and manufacturing overheads applied and credited with the amount of goods completed during the year.

Conclusion

To conclude, it must be said that ending manufacturing overheads represent under/over-applied overheads and Ending work in process balance represent the cost of goods still in process.