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

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

Supreme Videos, Inc. Balance Sheet January 1
Assets
Current assets:
Cash				$	84,000
Accounts receivable					123,000
Inventories:
Raw materials (film, costumes)	$	51,000
Videos in process		20,000
Finished videos awaiting sale		102,000			173,000
Prepaid insurance					13,200
Total current assets					393,200
Studio and equipment		772,000
Less accumulated depreciation		231,000			541,000
Total assets				$	934,200
Liabilities and Stockholders' Equity
Accounts payable				$	133,200
Capital stock	$	510,000
Retained earnings		291,000			801,000
Total liabilities and stockholders' equity				$	934,200

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 $225,000 in manufacturing overhead for an estimated allocation base of 5,000 camera-hours. The following transactions occurred during the year:

1. Film, costumes, and similar raw materials purchased on account, $206,000.
2. Film, costumes, and other raw materials used in production, $221,000 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).
3. Utility costs incurred on account in the production studio, $93,000.
4. Depreciation recorded on the studio, cameras, and other equipment, $105,000. 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, $151,000.
6. Costs for salaries and wages were incurred on account as follows:

Direct labor (actors and directors)	$	103,000
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	131,000
Administrative salaries	$	116,000

7. Prepaid insurance expired during the year, $9,100 (80% related to production of videos, and 20% related to marketing and administrative activities).
8. Miscellaneous marketing and administrative expenses incurred on account, $10,700.
9. Studio (manufacturing) overhead was applied to videos in production. The company used 8,000 camera-hours during the year.
10. Videos that cost $571,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
11. Sales for the year totaled $967,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $621,000.
12. Collections from customers during the year totaled $871,000.
13. Payments to suppliers on account during the year, $521,000; payments to employees for salaries and wages, $328,000.

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?

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.