Cost Flows; T-Accounts; Income Statement [LO1, LO2, LO5, LO6, LO7]

Fantastic Props, Inc., designs and fabricates movie props such as mock-ups of star-fighters and cybernetic robots. The company’s balance sheet as of January 1, the beginning of the current year, appears below:

Because each prop is a unique design and may require anything from a few hours to a month or more to complete, Fantastic Props uses a job-order costing system. Overhead in the fabrication shop is charged to props on the basis of direct labor cost. The company’s predetermined overhead rate for the year is based on a cost formula that estimated $80,000 in manufacturing overhead for an estimated allocation base of $100,000 direct labor dollars. The following transactions were recorded during the year:

a. Raw materials, such as wood, paints, and metal sheeting, were purchased on account, $80,000.

b. Raw materials were issued to production, $90,000; $5,000 of this amount was for indirect materials.

c. Payroll costs incurred and paid: direct labor, $120,000; indirect labor, $30,000; and selling and administrative salaries, $75,000.

d. Fabrication shop utilities costs incurred, $12,000.

e. Depreciation recorded for the year, $30,000 ($5,000 on selling and administrative assets;
$25,000 on fabrication shop assets).

f. Prepaid insurance expired, $4,800 ($4,000 related to fabrication shop operations, and $800 related to selling and administrative activities).
g. Shipping e xpenses i ncurred, $40,000.
h. Other manufacturing overhead costs incurred, $17,000 (credit Accounts Payable).
i. Manufacturing overhead was applied to production. Overhead is applied on the basis of direct labor c ost.
j. Movie props that cost $310,000 to produce according to their job cost sheets were completed.
k. Sales for the year totaled $450,000 and were all on account. The total cost to produce these movie props was $300,000 according to their job cost sheets.
l. Collections on account from customers, $445,000.
m. Payments on a ccount t o s uppliers, $150,000.
Required:
1. Prepare a T-account for each account on the company’s balance sheet, and enter the beginning balances.

2. Make entries directly into the T-accounts for transactions

(a) through (m). Create new T-accounts as needed. Determine an ending balance for each T-account.
3. Was manufacturing overhead underapplied or overapplied for the year? Assume that the company allocates any overhead balance between the Work in Process, Finished Goods, and Cost of Goods Sold accounts. Prepare a journal entry to show the allocation. (Round allocation percentages to one decimal place.)
4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured;
all of the information needed for the income statement is available in the T-accounts.)

Transcribed Image Text:

Current assets: Cash...... Accounts receivable Inventories: Raw materials. Fantastic Props, Inc. Balance Sheet January 1 Assets $ 15,000 40,000 Work in process Finished goods (props awaiting shipment). Prepaid insurance. Total current assets Buildings and equipment Less accumulated depreciation Total assets. $ 25,000 30,000 45,000 100,000 5,000 160,000 500,000 210,000 290,000 $450,000 Liabilities and Stockholders' Equity Accounts payable $ 75,000 Capital stock... $250,000 Retained earnings 125,000 375,000 Total liabilities and stockholders' equity. $450,000