MacLachlan Manufacturing Company had overapplied overhead of $20,000 in 2010. Before adjusting for overapplied or underapplied overhead, the ending inventories for direct materials, WIP, and finished goods were $75,000, $100,000, and $150,000, respectively. Unadjusted cost of goods sold was $250,000.

1. Assume that the $20,000 was written off solely as an adjustment to cost of goods sold. Prepare the journal entry.

2. Management has decided to prorate the $20,000 to the appropriate accounts (using the unadjusted ending balances) instead of writing it off solely as an adjustment of cost of goods sold. Prepare the journal entry. Would gross profit be higher or lower than in requirement 1? By how much?