Chapter 6, Problem 53P

1.

To determine

Prepare journal entry to record the given transactions.

Explanation of Solution

Prepare journal entry to record the cost incurred and applied on goods.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Material inventory	710,000
	Accounts payable		710,000
	(To record the purchase of direct materials on account.)

(Table 1)

• Material inventory is an asset and there is an increase value of an asset. Hence, debit the materials inventory account by $710,000.
• Accounts payable is a liability and there is an increase in the value of liability. Hence, credit the accounts payable account by $710,000.

Prepare journal entry to record the conversion cost incurred.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Conversion incurred	1,450,000
	Wages payable		1,450,000
	(To record the cost of conversion)

(Table 2)

• Conversion cost incurred is an expense and there is an increase in the value of expense. Hence, debit the materials inventory account by $1,450,000.
• Wages payable is a liability and there is an increase in the value of liability. Hence, credit the wage payable account by $1,450,000.

Prepare journal entry to record the completion of yards of the product.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Finished goods	1,976,250
	Material inventory (1)		658,750
	Conversion cost applied (2)		1,317,500
	(To record the completion of yards)

(Table 3)

• Finished goods inventory is an asset and there is an increase in the value of an asset. Hence, debit the finished goods by $1,976,250.
• Material inventory is an asset and there is a decrease value of an asset. Hence, credit the materials inventory account by $658,750.
• Conversion cost applied an asset and there is a decrease value of an asset. Hence, credit the conversion cost account by $1,317,500.

Working notes:

1. Calculate the amount of material inventory.

$\begin{array}{c}\text{Material inventory = Completion of yards}\times \left(\begin{array}{l}\text{Direct materials per }\\ \text{yard of cloth}\end{array}\right)\\ \text{=155,000}\times \text{\$4}\text{.25}\\ \text{=\$658,750}\end{array}$

2. Calculate the amount of conversion cost applied.

$\begin{array}{c}\text{Conversion cost applied = Completion of yards}\times \left(\begin{array}{l}\text{Conversion cost per }\\ \text{yard of cloth}\end{array}\right)\\ \text{=155,000}\times \text{\$8}\text{.50}\\ \text{=\$1,317,500}\end{array}$

Prepare journal entry to record the closing entry for conversion cost.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Conversion cost applied	1,317,500
	Cost of goods sold	132,500
	Conversion cost incurred		1,450,000
	(To record the closing of two conversion cost in cost of good sold)

(Table 4)

• Conversion cost applied is an asset and there is an increase in the value of an asset. Hence, debit the conversion cost applied by $1,317,500.
• Cost of goods sold is an expense and there is an increase in the value of expense. Hence, credit the cost of goods sold account by $132,500.
• Conversion cost incurred is an expense and there is a decrease in the value of expense. Hence, credit the materials inventory account by $1,450,000.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cost of goods sold (3)	8,250
	Materials inventory		8,250
	(To record the closing of actual usage of inventory to cost of goods sold)

(Table 5)

• Cost of goods sold is an expense and there is an increase in the value of expense. Hence, credit the cost of goods sold account by $8,250.
• Material inventory is an asset and there is a decrease value of an asset. Hence, credit the materials inventory account by $8,250.

Working notes:

3. Calculate the cost of goods sold.

$\begin{array}{c}\text{Cost of good sold = }\left(\begin{array}{l}\text{Beginning inventory +}\\ \text{Purchase}-\\ \text{Closing inventory}\end{array}\right)-\left(\begin{array}{l}\text{Cost of the material }\\ \text{on completion }\\ \text{of 155,000 yard}\end{array}\right)\\ =\left(\$142,000+\$710,000-\$185,000\right)-\$658,750\\ =\$667,000-\$658,750\\ =\$8,250\end{array}$

2.

To determine

State the reason under which backflush method is used by the company.

Explanation of Solution

Only when work in process level is small backflush method is used by the company. Moreover, this might lead to usage of Just-in-time method were the purchase properly coordinate with scheduled production on daily basis.