Chapter 1, Problem 22PSB

a.

To determine

The balance sheet and income statement of Company W.

Answer to Problem 22PSB

Calculation of income statement of Company W is as follows:

Table (1)

Calculation of balance sheet of Company W is as follows:

Table (2)

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Working notes:

The entire $84,000 is treated as operating expenses.

…… (1)

Calculate the total cash:

$\begin{array}{c}\text{Total cash}=\text{Acquired capital}+\text{Sales revenue}-\text{Spending}\\ =\$86,000+\$75,000-\$84,000\\ =\$161,000-84,000\\ =\$77,000\end{array}$

Hence, the total cash is $77,000.

…… (2)

b.

To determine

The balance sheet and income statement of Company W.

Answer to Problem 22PSB

Calculation of income statement of Company W is as follows:

Table (3)

Calculation of balance sheet of Company W is as follows:

Table (4)

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Working notes:

Calculate the depreciation:

$\begin{array}{c}\text{Depreciation}=\frac{\text{Cost of trucks }}{\text{Number of years}}\\ =\frac{\$84,000}{5}\\ =\$16,800\end{array}$

…… (3)

The depreciation amount $16,800 must be adjusted in the balance sheet as accumulated depreciation.

…… (4)

c.

To determine

The balance sheet and income statement of Company W according to GAAP.

Answer to Problem 22PSB

Calculation of income statement of Company W is as follows:

Table (5)

Calculation of balance sheet of Company W is as follows:

Table (6)

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Working notes:

Calculate the depreciation on the manufacturing equipments:

$\begin{array}{c}\text{Depreciation}=\frac{\text{Manufacturing equipment}-\text{Salvage value}}{\text{Number of years}}\\ =\frac{\$40,000-\$4,000}{6}\\ =\frac{\$36,000}{6}\\ =\$6,000\end{array}$

Hence, the depreciation cost is $6,000.

Calculate the cost per unit:

$\begin{array}{c}\text{Cost per unit}=\frac{\text{Materials}+\text{Labor}+\text{Overheads (depreciation on equipments)}}{\text{Total number of units produced}}\\ =\frac{\$16,000+\$24,000+\$6,000}{2,300\text{ units}}\\ =\frac{\$46,000}{2,300\text{ units}}\\ =\$20\end{array}$

Hence, the cost per unit is $20.

Calculate the cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold}=\text{Cost per unit}\times \text{Number of goods sold}\\ =\$20\times 2,000\text{ units}\\ =\$40,000\end{array}$

Hence, the cost of goods sold is $40,000.

…… (5)

Calculate the total finished goods:

$\begin{array}{c}\text{Finished goods}=\text{Cost per unit}\times \left(\text{Completed goods}-\text{Number of goods sold}\right)\\ =\$20\times \left(2,300\text{ units}-2,000\text{ units}\right)\\ =\$20\times 300\text{ units}\\ =\$6,000\end{array}$

Hence, the finished goods is $6,000.

…… (6)

Calculate the accumulated depreciation on the manufacturing equipments:

$\begin{array}{c}\text{Accumulated depreciation}=\frac{\text{Manufacturing equipment}-\text{Salvage value}}{\text{Number of years}}\\ =\frac{\$40,000-\$4,000}{6}\\ =\frac{\$36,000}{6}\\ =\$6,000\end{array}$

Hence, the accumulated depreciation cost is $6,000.

…… (7)

d.

To determine

Explain the reason why management might the company be more interested in average cost than actual cost.

Explanation of Solution

The exact cost of the product cannot be determined because the labor and material usage will differ among the same products. Cost average is an element that smoothens these differences. Thus, the management prefers average cost than exact cost.