Chapter 19, Problem 2BPSB

To determine

Concept Introduction:

Journal entries-

The business runs with the transactions it makes. Every transaction results in some outcome like the creation of asset, liability, income, loss, gain or expense. The debits and the credits are made on the basis of the rules of the accounting.

To prepare:

To prepare the journam entry.

Answer to Problem 2BPSB

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
(a)	Work in process inventory	12,200
	Raw materials inventory		12,200
	(To ssign raw material inventory to job)
(b)	Work in process inventory	13,000
	Factory wages payable		13,000
	(To assign cost of direct labor to job)
(c)	Work in process inventory	26,000
	Factory overhead		26,000
	(To apply overhead at 200% of direct labor cost)
(d)	Factory overhead	2,100
	Raw materials inventory		2,100
	(To assign cost of indirect material to job)
(e)	Factory overhead	3,000
	Factory wages payable		3,000
	(To assign cost of indirect labour to job)

Explanation of Solution

Journal entries are explained as follows

(a) Work in process is a current asset and its increases so it is debited. Raw material inventory is a current asset and its balance decreases, so it is creditd.

Amount is calculated as follows-

Given,

Direct materials to Job 603 = $4,600

Direct materials to Job 604 = $7,600

  $\begin{array}{l}\begin{array}{l}Amount=DirectmaterialstoJob603+DirectmaterialstoJob\text{ 6}04\hfill \\ Amount=4,600+7,600\hfill \end{array}\\ Amount=12,200\end{array}$

(b) Work in process is a current asset and its increases so it is debited. Factory wages are current liabilities and its balance increases to its credited.

Amount is calculated as follows-

Given,

Direct labor to Job 603 = $5,000

Direct labor to Job 604 = $8,000

  $\begin{array}{l}\begin{array}{l}Amount=DirectlabortoJob603+DirectlabortoJob\text{ 6}04\hfill \\ Amount=5,000+8,000\hfill \end{array}\\ Amount=13,000\end{array}$

(c) Work in process is a current asset and its increases so it is debited. Factory overhead is an expense and its balance decreases, so it is credited.

  $\begin{array}{l}\begin{array}{l}Amount=DirectLabor*200\%\hfill \\ Amount=13,000*200\%\hfill \end{array}\\ Amount=26,000\end{array}$

(d) Factory overhead is a cost so it is debited. Raw material inventory is an asset and its balance decreases, so it is credited.

(e)Factory overhead is a cost so it is debited. Factory wages payable is a liability and it is increasing so it is credited.

Conclusion:

Thus, the journal entries are prepared.

To determine

Concept Introduction:

Cost of goods sold -

Cost of goods sold can be defined as the total cost assigned to the goods that are sold during a period of time. It is calculated by summing up all the costs incurred starting from purchases till the process of manufacturing. Adjusting entries-

Adjusting entries are prepared to complete the financial statement of the company and to reflect the accrual method of accounting. Adjusting entries are prepared before issuance of financial statement.

Under or Over applied overhead-

Under or Over applied overhead- It is the difference between the actual and applied overhead.

If the actual overhead incurred is more than the overhead applied during a particular period, then it is a case of under-applied of overhead cost.

If the actual overhead incurred is less than the overhead applied during a particular period, then it is a case of over-applied of overhead cost.

To determine revised balance and to prepare the adjusting entry.

Answer to Problem 2BPSB

Factory Overhead
Particulars	Amount ($)	Particulars	Amount ($)
Beginning balance	27,000	Work in process inventory	26,000
Factory wages payable	3,000	Under applied overhead	6,100
Raw material inventory	2,100
Balance	32,100		32,100

Adjusting journal entry:

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
A.	Cost of goods sold	6,100
	Factory overhead		6,100
	(To assign cost of indirect labor to job)

Explanation of Solution

Underapplied overhead balance is calculated as follows-

  $\begin{array}{l}Totalbalance=Begiiningbalance+Factorywagespayable+Rawmaterialinventory\hfill \\ Totalbalance=27,000+3,000+2,100\hfill \\ Totalbalance=32,100\hfill \\ Underappliedoverhead=Totalbalance-Workinprocessinventory\hfill \\ Underappliedoverhead=32,100-26,000\hfill \\ Underappliedoverhead=6,100\hfill \end{array}$

Explanation for journal entry-

When overhead is underapplied, the jobs are charged with less overhead than the actual and cost of goods sold will be charged with less overhead. Cost of goods is a cost and its balance increases, so it is debited and factory overhead is credited.

Conclusion:

Thus, overhead is under applied by $6,100.

To determine

Concept Introduction:

Trial balance-

Trial balance is an accounting statement which contains all debit and credit balances of the ledger accounts in which transactions have been posted during a period. It is prepared to check the arithmetical accuracy of transactions.

To prepare:

To prepare trial balance.

Answer to Problem 2BPSB

Revised trial balance
Particulars	Debit (Amount $)	Credit (Amount $)
Cash	64,000
Account receivable	42,000
Raw material inventory	11,700
Work in process inventory	51,200
Finished goods inventory	9,000
Prepaid rent	3,000
Factory wages 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 expenses	45,000
Total	337,000	337,000

Explanation of Solution

Total of debit side is calculated as follows-

  $\begin{array}{l}\begin{array}{l}\begin{array}{l}Totalofdebitside=Cash+Accountreceivable+Rawmaterialinventory+Workinprocessinventory\\ +Finishedgoodsinventory+Costofgoodssold+Operatingexpenses\end{array}\hfill \\ Totalofdebitside=64,000+42,000+11,700+51,200+9,000+3,000+111,100+45,000\hfill \end{array}\\ Totalofdebitside=337,000\end{array}$

Total of credit side is calculated as follows-

  $\begin{array}{l}Totalofcreditside=Factorywagespayable+Accountspayable+Notespayable+\\ Commonstock+Retainedearnings+Sales\\ Totalofcreditside=16,000+10,500+13,500+30,000+87,000+180,000\\ Totalofcreditside=337,000\end{array}$

Conclusion:

Thus, revised trial balance is prepared.

To determine

Concept Introduction:

Income statement-

Income statement refers to the financial statement that evaluates the financial performance of the company. It shows the expenses, revenues and net income of a firm over specific period of time. Therefore evaluation of financial performance can be undertaken by identifying the revenues and expenses incurred by the business through both non-operating and operating activities.

Balance sheet-

Balance sheet is a statement which shows the financial position of the company at a particular date. The balance sheet explains about the company's assets and also explains how these assets are being financed. Assets are usually financed either through debt or equity. So, balance sheet gives the clear picture of company's assets, liabilities and equity.

To prepare:

To prepare income statement and balance sheet.

Answer to Problem 2BPSB

Income statement
For the year ended 2019
Particulars	Amount ($)
Sales revenue	180,000
Less: Cost of goods sold	(111,100)
Gross profit	68,900
Less: Operating expense	(45,000)
Net income	23,900

Balance Sheet
As on December 31, 2019
Details	Amount ($)	Amount ($)
Assets
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 Stockholder's Equity
Liabilities:
Factory wages payable	16,000
Accounts payable	10,500
Notes payable	13,500
Total liabilities		40,000
Stockholder's Equity:
Common stock	30,000
Retained earnings	110,900	140,900
Total Liabilities and Stockholder's Equity		180,900

Explanation of Solution

Income Statement

  $\begin{array}{l}Grossprofit=Netincome–Costofgoodssold\hfill \\ Grossprofit=180,000-111,100\hfill \\ Grossprofit=68,900\hfill \end{array}$

  $\begin{array}{l}\begin{array}{l}Netincome=Grossprofit-Operatingexpenses\hfill \\ Netincome=68,900-45,000\hfill \end{array}\\ Netincome=23,900\end{array}$

Balance sheet

Assets-

  $\begin{array}{l}\begin{array}{l}\begin{array}{l}Assets=Cash+Accountsreceivable+Rawmaterialinventory+Workinprocessinventory\\ +Finishedgoodsinventory+Prepaidrent\end{array}\hfill \\ Assets=64,000+42,000+11,700+51,200+9,000+3,000\hfill \end{array}\\ Assets=180,900\end{array}$

Total Liabilities and Stockholder's Equity-

  $\begin{array}{l}TotalLiabilitiesandStockholder\text{'}sEquity=Liabilities+Stockholder\text{'}sEquity\hfill \\ \begin{array}{l}TotalLiabilitiesandStockholder\text{'}sEquity=\left(Factorywagespayable+Accountspayable+Notespayable\right)\\ +\left(Commonstock+Retainedearnings\right)\end{array}\hfill \\ TotalLiabilitiesandStockholder\text{'}sEquity=(16,000+10,500+13,500)+(30,000+110,900)\hfill \\ TotalLiabilitiesandStockholder\text{'}sEquity=40,000+140,900\hfill \\ TotalLiabilitiesandStockholder\text{'}sEquity=180,900\hfill \end{array}$

Conclusion:

Thus, Income statement and balancesheet is prepared.

To determine

Concept Introduction:

Income statement-

Income statement refers to the financial statement that evaluates the financial performance of the company. It shows the expenses, revenues and net income of a firm over specific period of time. Therefore evaluation of financial performance can be undertaken by identifying the revenues and expenses incurred by the business through both non-operating and operating activities.

Balance sheet-

Balance sheet is a statement which shows the financial position of the company at a particular date. The balance sheet explains about the company's assets and also explains how these assets are being financed. Assets are usually financed either through debt or equity. So, balance sheet gives the clear picture of company's assets, liabilities and equity.

To Analyse:

To analyse the impact of errors.

Answer to Problem 2BPSB

Impact on Income statement-

If direct material of $2,100 is treated as indirect materail, cost of goods sold in income statement will increase and income earned by the entity decreases.

Imapct on Balance sheet-

If direct material of $2,100 is treated as indirect material, Retained earnings as per balance sheet decreases.

Explanation of Solution

Answer is explained above.

Conclusion:

Thus, Impact of error on income statement and balance sheet is analysed.