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				$	75,000
Accounts receivable					114,000
Inventories:
Raw materials (film, costumes)	$	42,000
Videos in process		20,000
Finished videos awaiting sale		93,000			155,000
Prepaid insurance					11,400
Total current assets					355,400
Studio and equipment		754,000
Less accumulated depreciation		222,000			532,000
Total assets				$	887,400
Liabilities and Stockholders' Equity
Accounts payable				$	104,400
Capital stock	$	501,000
Retained earnings		282,000			783,000
Total liabilities and stockholders' equity				$	887,400

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 $360,000 in manufacturing overhead for an estimated allocation base of 9,000 camera-hours. The following transactions occurred during the year:

1. Film, costumes, and similar raw materials purchased on account, $197,000.
2. Film, costumes, and other raw materials used in production, $212,000 (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, $84,000.
4. Depreciation recorded on the studio, cameras, and other equipment, $96,000. 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, $142,000.
6. Costs for salaries and wages were incurred on account as follows:

Direct labor (actors and directors)	$	94,000
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	122,000
Administrative salaries	$	107,000

7. Prepaid insurance expired during the year, $8,200 (80% related to production of videos, and 20% related to marketing and administrative activities).
8. Miscellaneous marketing and administrative expenses incurred on account, $9,800.
9. Studio (manufacturing) overhead was applied to videos in production. The company used 9,100 camera-hours during the year.
10. Videos that cost $562,000 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 $949,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $612,000.
12. Collections from customers during the year totaled $862,000.
13. Payments to suppliers on account during the year, $512,000; payments to employees for salaries and wages, $303,000.

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.