Problem 3-17 (Algo) Cost Flows; T-Accounts; Income Statement [LO3-2, LO3-3, LO3-4]

Supreme Videos, Incorporated, produces short musical videos for sale to retail outlets. The companys balance sheet accounts as of January 1, are given below.

Supreme Videos, Incorporated Balance Sheet January 1
Assets
Current assets:
Cash		$ 81,000
Accounts receivable		120,000
Inventories:
Raw materials (film, costumes)	$ 48,000
Videos in process	21,000
Finished videos awaiting sale	99,000	168,000
Prepaid insurance		12,600
Total current assets		381,600
Studio and equipment	766,000
Less accumulated depreciation	228,000	538,000
Total assets		$ 919,600
Liabilities and Stockholders' Equity
Accounts payable		$ 124,600
Capital stock	$ 507,000
Retained earnings	288,000	795,000
Total liabilities and stockholders' equity		$ 919,600

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The companys predetermined overhead rate for the year is based on a cost formula that estimated $320,000 in manufacturing overhead for an estimated allocation base of 8,000 camera-hours. The following transactions occurred during the year:

1. Film, costumes, and similar raw materials purchased on account, $203,000.
2. Film, costumes, and other raw materials used in production, $218,000 (70% of this material was considered direct to the videos in production, and the other 30% was considered indirect).
3. Utility costs incurred in the production studio, $90,000.
4. Depreciation recorded on the studio, cameras, and other equipment, $102,000. Three-fourths of this depreciation related to production of the videos, and the remainder related to equipment used in marketing and administration.
5. Advertising expense incurred on account, $148,000.
6. Costs for salaries and wages were incurred as follows:

Direct labor (actors and directors)	$ 100,000
Indirect labor (carpenters to build sets, costume designers, and so forth)	$ 128,000
Administrative salaries	$ 113,000

1. Prepaid insurance expired during the year, $8,800 (70% related to production of videos, and 30% related to marketing and administrative activities).
2. Miscellaneous marketing and administrative expenses incurred, $10,400.
3. Studio (manufacturing) overhead was applied to videos in production. The company used 9,400 camera-hours during the year.
4. Videos that cost $568,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
5. Sales for the year totaled $961,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $618,000.
6. Collections from customers during the year totaled $868,000.
7. Payments to suppliers on account during the year, $518,000; payments to employees for salaries and wages, $325,000.

Required:

1. Prepare a T-account for each account on the companys balance sheet and enter the beginning balances.

2. Record the transactions directly into the T-accounts. Key your entries to the letters (a) through (m) above.

3. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year? By how much?

4. Prepare a schedule of cost of goods manufactured.

5. Prepare a schedule of cost of goods sold.

6. Prepare an income statement for the year.