Loose-Leaf for Financial and Managerial Accounting
Loose-Leaf for Financial and Managerial Accounting
7th Edition
ISBN: 9781260004861
Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 15, Problem 2PSB
To determine

Overhead:

Overheads are the cost and the expenses a company incurs of the production of a particular goods or services which are not directly related to the production. It does not include labor and direct material.

Direct Material Cost:

Direct material cost is the cost that a company incurs while manufacturing a certain product or service. It includes all the cost and expenses that are directly associated with the production such as raw materials.

Direct Labor Cost:

Direct labor cost is the cost that a company incurs in giving wages to the people that are directly associated with the production work.

Journal Entries:

Journal entries are the entries that are made in the books of accounts to record every transaction that happens in the business in the chronological order.

Accounting rules for journal entries:

  • To Increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
  • To Decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.
  • Adjusted Trial Balance:

    It is a statement which contain balances of all account after all the adjusting entries has been made.

    Income Statement:

    It is a financial statement which show the profit and loss made by the firm in a particular accounting period.

    Balance sheet:

    It shows the financial position of a firm. It consists of asset and liabilities.

    1.

    To prepare: Journal entries.

    Expert Solution
    Check Mark

    Explanation of Solution

    a.

    To record the entry to assign direct materials cost to work in process inventory.

      Date Account Title and Explanation Post ref Debit ($) Credit ($)
      Work in Process inventory 12,200
      Raw materials inventory 12,200
      (To record raw materials assign to job)
      Table (1)
    • Work in process inventory is an asset account. The account increases as the raw materials are used in work in process that increases the balance of the work in process inventory account, hence it is debited.
    • Raw materials inventory is an asset account. The account decreases as the raw materials are used in the work in process.

    Working Notes:

    Given,
    Direct material to job 603 is $4,600.
    Direct material to job 604 is $7,600.

    Computation of total direct materials,
    TotalDirectMaterials=Direct materials to job 603+Direct materials to job 604 =$4,600+$7,600 =$12,200

    Total Direct materials are $12,200.

    b.

    To record the entry to assign direct labor cost to work in process inventory.

      Date Account Title and Explanation Post ref Debit ($) Credit ($)
      Work in Process inventory 13,000
      Factory Wage Payable 13,000
      (To record cost of direct labor to job)
      Table (2)
    • Work in process inventory is an asset account. The account increases as the direct labor has been used in work in process inventory that increases the asset, hence it is debited.
    • Factory Wage payable is an expense account. The account decreases as the expenses of direct labor are transferred to work in process inventory, hence it is credited.

    Working note:

    Given,
    Direct labor assigned to job 603 is $5,000.
    Direct labor assigned to job 604 is $8,000.

    Computation of total direct labor,

      TotalDirectLabor=( Direct labor assigned to job 603 +Direct labor assigned to job 604 ) =$5,000+$8,000 =$13,000.

    Hence, the total direct labor is $13,000.

    c.

    To Record overhead applied.

      Date Account Title and Explanation Post ref Debit ($) Credit ($)
      Work In Process 26,000
      Overhead 26,000
      (To assign cost of overhead to job)
      Table (3)
    • Work in process is an asset account. The account increases as the overhead is assigned to job as this increase the work in process, hence it is debited.
    • Overhead is an expense account. The Account decreases as the overhead is assigned and transferred to work in process, hence it is credited.

    Working note:

    Given,
    Overhead rate is 200%.

    Formula to calculate the applied overhead,

      AppliedOverhead=DirectLaborCost×OverheadRate

    Substitute $13,000 for direct labor cost and 200% for overhead rate.

      AppliedOverhead=$13,000×200% =$26,000

    Hence, applied overhead is $26,000.

    d.

    To record indirect material costing $2,100

      Date Account Title and Explanation Post ref Debit ($) Credit ($)
      Factory Overhead account 2,100
      Inventory-raw material 2,100
      (To record the overhead cost)
      Table (4)
    • Factory overhead is an expense account. Factory overhead increases as there is an indirect expense and all the expenses are debited.
    • Inventory raw materials are an asset account. Inventory decreases as the expense is not directly related to the production and all the assets are credited as their value decreases.

    e.

    To record indirect labor

      Date Account Title and Explanation Post ref Debit ($) Credit ($)
      Factory Overhead 3,000
      Factory Wages Payable 3,000
      (To record the overhead cost)
      Table (5)
    • Factory overhead is an expense account. Factory overhead increases as there is an indirect labor and all the expenses are debited.
    • Factory Wages payable is an expense account. The account decreases as the balance of the indirect labor is transferred to factory overhead, hence it is credited.

    2.

    To determine

    To prepare: T account for factory overhead and journal entry.

    2.

    Expert Solution
    Check Mark

    Explanation of Solution

      Factory Overhead
      Date Particular Debit ($) Date Particular Credit ($)
      Balance b/f 27,000 Work in process inventory 26,000
      Raw materials inventory 2,100 Balance c/f 6,100
      Factory Wages Payable 3,000
      32,100 32,100
      Table (6)

    Hence, the under applied overhead and the balance figure is $32,100

    To record the entry for under applied overhead

      Date Account Title and Explanation Post ref Debit ($) Credit ($)
      Factory Overhead 32,100
      Cost of goods sold 32,100
      (To record under applied overhead)
      Table (7)
    • Factory overhead is an expense account. The account increases as the balance of over applied overhead has been transferred to factory overhead, hence it is debited.
    • Cost of goods sold is an expense account. The account decreases as over applied goods is reduced from cost of goods sold that decreases the balance of cogs account. Hence, it is credited.

    3.

    To determine

    To prepare: Trial balance.

    3.

    Expert Solution
    Check Mark

    Explanation of Solution

      Adjusted Trial Balance
      Particulars Debit ($) Credit ($)
      Cash 64,000
      Accounts Receivable 42,000
      Raw materials inventory 11,700
      Work in Process inventory 51,200
      Finished goods inventory 9,000
      Prepaid Rent 3,000
      Factories Wage Payable 16,000
      Accounts Payable 10,500
      Notes Payable 13,500
      Common Stock 30,000
      Retained Earnings 87,000
      Sales 180,000
      Cost of goods sold 111,100
      Operating Expense 45,000
      Total 337,000 337,000
      Table (8)

    Hence, the trial balance is matched.

    4.

    To determine

    To prepare: The income statement.

    4.

    Expert Solution
    Check Mark

    Explanation of Solution

      BB System
      Statement of Income
      For the year ended on December 31
      Details Amount ($)
      Sales revenue 180,000
      Less: Cost of goods sold (111,100)
      Gross income 68,900
      Less: Operating expense (45,000)
      Net income 23,900
      Table (9)

    Hence, the net income is $23,900.

    5

    To determine

    To prepare: Balance sheet.

    5

    Expert Solution
    Check Mark

    Explanation of Solution

      BB System
      Balance Sheet as on 31st December, 2017.
      Details Amount ($) Amount ($)
      Current Assets:
      Cash 64,000
      Accounts Receivable 42,000
      Raw Material inventory 11,700
      Work in process inventory 51,200
      Finished goods inventory 9,000
      Prepaid Rent 3,000
      Total Assets 180,900
      Liabilities and Equity:
      Liabilities:
      Factory Wages Payable 16,000
      Accounts Payable 10,500
      Notes Payable 13,500
      Total Liabilities: 40,000
      Equity:
      Common Stock 30,000
      Retained Earnings 110,900
      Total Equity 140,900
      Total Liabilities and Equity 180,900
      Table (10)

    Working note:

    Given,
    Retained earnings in beginning are $87,000.

    Computation of total retained earnings,

      TotalRetainedEarnings=RetainedEarningsatthebeginning+NetIncome =$87,000+$23,900 =$110,900

    Hence, the total retained earnings are $110,900.

    5

    To determine

    To explain: The impact of error on the income statement and the balance sheet at December 31st, 2017.

    5

    Expert Solution
    Check Mark

    Explanation of Solution

    Impact on income statement

    • If the indirect materials of $5,600 would be treated as the direct materials then it would be deducted from the cost of goods sold in the income statement and net come will decrease.
    • Impact on balance sheet
    • If the indirect materials of $5,600 would be treated as the direct materials, then the retained earnings would have decreased.

    Hence, The treatment of indirect materials as direct materials would have a huge impact on income statement and balance sheet.

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    Chapter 15 Solutions

    Loose-Leaf for Financial and Managerial Accounting

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