Q32PGA - Horngren'S Financial And Managerial Accounting

Question

Mighty Stars produces stars for elementary teachers to reward their students. Mighty Stars’ trial balance on June 1 follows:

MIGHTY STARS Trial Balance June 1, 2018
	Balance
Account title	Debit	Credit
Cash	\(14,000
Accounts receivable	160,000
Inventories:
Raw material	6,000
Work-in-process	40,000
Finished goods	20,400
Property, plant and equipment	220,000
Accumulated depreciation		\)75,000
Accounts payable		134,000
Wages payable		2,600
Common stock		139,000
Retained earnings		109,800
Sales revenue		0
Cost of goods sold	0
Manufacturing overhead	0
Selling and administrative expenses	0
Totals	\(460,400	\)460,400

June 1 balances in the subsidiary ledgers were as follows:

• Raw Materials Inventory subsidiary ledger: Paper, \(4,000; indirect materials, \)2,000

• Work-in-Process Inventory subsidiary ledger: Job 120, \(40,000; Job 121, \)0

• Finished Goods Inventory subsidiary ledger: Large Stars, \(9,900; Small Stars, \)10,500

June transactions are summarized as follows:

a. Collections on account, \(145,000.

b. Selling and administrative expenses incurred and paid, \)32,000.

c. Payments on account, \(39,000.

d. Materials purchases on account: Paper, \)24,000; indirect materials, \(4,200.

e. Materials requisitioned and used in production:

Job 120: Paper, \)950

Job 121: Paper, \(7,900

Indirect materials, \)1,200

f. Wages incurred during June, \(39,000. Labor time records for the month: Job 120, \)3,600; Job 121, \(17,000; indirect labor, \)18,400.

g. Wages paid in June include the balance in Wages Payable at May 31 plus \(36,100 of wages incurred during June.

h. Depreciation on plant and equipment, \)2,500.

i. Manufacturing overhead allocated at the predetermined overhead allocation rate of 80% of direct labor costs.

j. Jobs completed during the month: Job 120 with 700,000 Large Stars at a total cost of \(47,430.

k. Sales on account: all of Job 120 for \)104,000.

l. Adjusted for overallocated or underallocated manufacturing overhead.

Requirements

1. Journalize the transactions for the company.

2. Open T-accounts for the general ledger, the Raw Materials Inventory subsidiary ledger, the Work-in-Process Inventory subsidiary ledger, and the Finished Goods Inventory subsidiary ledger. Insert each account balance as given, and use the reference Bal. Post the journal entries to the T-accounts using the transaction letters as a reference.

3. Prepare a trial balance at June 30, 2018.

4. Use the Work-in-Process Inventory T-account to prepare a schedule of cost of goods manufactured for the month of June.

5. Prepare an income statement for the month of June.

Step-by-Step Solution

Answer

1. Journal entry for the company to show the transactions undertaken by the company during the month is shown in step 1.

 

2. The closing balance of raw material inventory subsidiary ledger T-account is $24,150, Work-in-process inventory subsidiary ledger T-account is $38,500, and of finished goods inventory subsidiary ledger T-account is $20,400.

 

3. The total balance of trial balance for the month of June is $471,350.

 

4. The schedule of cost of goods manufactured using the work-in-process inventory account shows the cost of manufacturing for the company as $47,430.

 

5. The net income of the company for the month is $18,950 as per the income statement prepared.

Step 1: Meaning of Raw Material Inventory

Raw material inventory is the total cost incurred by a company on the purchase of the raw materials used in the production of final products. It is treated as current asset on the balance sheet.

Step 2: Journal entries

Date	Particulars	Amount ($)	Amount ($)
a.	Cash	145,000
	Account receivable		145,000
	(Collection on account)
b.	Selling and administrative expenses	32,000
	Cash		32,000
	(Selling and admin expenses incurred and paid)
c.	Account payable	39,000
	Cash		39,000
	(payment on account)
d.	Raw material inventory-Direct	24,000
	Raw material inventory-Indirect	4,200
	Account payable		28,200
	(material purchases on account)
e.	Work-in-process inventory (950+7,900)	8,850
	Manufacturing overhead	1,200
	Raw material inventory		10,050
	(Issue of raw material)
f.	Work-in-process inventory ($17,000+$3,600)	20,600
	Manufacturing overhead	18,400
	Wages payable		39,000
	(wages incurred during the year)
g.	Wages payable (2,600+36,100)	38,700
	Cash		38,700
	(wages paid)
h.	Manufacturing overhead	2,500
	Accumulated depreciation		2,500
	(Depreciation on plant & equipment)
i.	Work-in-process inventory  (80% of 20,600)	16,480
	Manufacturing overhead		16,480
	(allocation of manufacturing overhead)
j.	Finished goods inventory	47,430
	Work-in-process inventory		47,430
	(Job completed during the month)
k.	Account receivable	104,000
	Sales revenue		104,000
	(sales on account)
l.	Cost of goods sold	5,620
	Manufacturing overhead		5,620
	(adjustment of underallocated overhead)
j.	Cost of goods sold	47,430
	Finished goods		47,430

Step 3: T-account for general ledgers

Raw material inventory subsidiary ledger

Particulars	Amount ($)	Particulars	Amount ($)
Opening Balance	6,000	E	8,850
D	28,200	E	1,200
		Closing Balance	24,150

Work-in-process inventory subsidiary ledger

Particulars	Amount ($)	Particulars	Amount ($)
Opening Balance	40,000	J	47,430
E	8,850
F	20,600
I	16,480	Closing Balance	38,500

Finished goods inventory subsidiary ledger

Particulars	Amount ($)	Particulars	Amount ($)
Opening Balance	20,400	M	47,430
J	47,430	Closing Balance	20,400

 

Step 4: Trial balance

Particulars	Debit ($)	Credit ($)
Cash (14,000+145,000-32,000-39,000-38,700)	49,300
Account receivable (160,000-145,000+104,000	119,000
Inventories:
Raw material	24,150
Work-in-process	38,500
Finished goods	20,400
Property plant and equipment	220,000
Accumulated depreciation (75,000+2,500)		77,500
Account payable (134,000-39,000+28,200)		123,200
Wages payable (2,600+39,000-38,700)		2,900
Common stock		139,000
Retained earnings (109,800+18,950)		128,750
Sales revenue
Cost of goods sold
Manufacturing overhead
Selling and administrative expenses
Totals	471,350	471,350

Step 5: Schedule of cost of goods manufactured for the month of June

Particulars	Amount ($)
Opening WIP	40,000
Direct material	8,850
Direct labor	20,600
Manufacturing overhead	16,480
Less: Closing WIP	(38,500)
Cost of goods manufactured	47,430

Step 6: Income statement for the month of June

Particulars	Amount ($)
Sales	104,000
Less: Cost of goods sold (47,430 + 5,620)	(53,050)
Gross profit	50,950
Less: Selling and administrative expenses	(32,000)
Net income	18,950