PROBLEM 3-24 Journal Entries; T-Accounts; Disposition of Underapplied or Overapplied Overhead; Income Statement [LO3, L04, LO5, L07, L08] Celestial Displays, Inc., puts together large-scale fireworks displays primarily for Fourth of July celebrations sponsored by corporations and municipalities. The company assembles and orches- trates complex displays using pyrotechnic components purchased from suppliers throughout the world. The company has built a reputation for safety and for the awesome power and brilliance of its computer-controlled shows. Celestial Displays builds its own launch platforms and its own elec- tronic controls. Because of the company's reputation, customers order shows up to a year in ad- vance. Since each show is different in terms of duration and components used, Celestial Displays uses a job-order costing system. Celestial Displays' trial balance as of January 1, the beginning of the current year, is given below: Cash........ Accounts Receivable ... Raw Materials. Work in Process .. Finished Goods ...... Prepaid Insurance ........ Buildings and Equipment. Accumulated Depreciation .... Accounts Payable.. Salaries and Wages Payable..... Capital Stock Retained Earnings .. $ 9,000 30,000 16,000 21,000 38,000 7,000 300,000 $128,000 60,000 3,000 200,000 30,000 Total ..... $421,000 $421,000 The company charges manufacturing overhead costs to jobs on the basis of direct labor-hours. (Each customer order for a complete fireworks display is a separate job.) Management estimated that the company would incur $135,000 in manufacturing overhead costs in the fabrication and electronics shops and would work 18,000 direct labor-hours during the year. The following transactions occurred during the year: a. Raw materials, consisting mostly of skyrockets, mortar bombs, flares, wiring, and electronic components, were purchased on account, $820,000. b. Raw materials were issued to production, $830,000 ($13,000 of this amount was for indirect materials, and the remainder was for direct materials). Chapter 3 e. g. D c. Fabrication and electronics shop payrolls were accrued, $200,000 (70% direct labor and 300 indirect labor). A total of 20,800 direct labor-hours were worked during the year. d. Sales and administrative salaries were accrued, $150,000. The company prepaid additional insurance premiums of $38,000 during the year. Prepaid issuran expiring during the year was $40,000 (only $600 relates to selling and administrative; the othe $39,400 relates to the fabrication and electronics shops because of the safety hazards involved in handling fireworks). f. Marketing cost incurred, $100,000. Depreciation charges for the year, $40,000 (70% relates to fabrication and electronics shop assets. and 30% relates to selling and administrative assets). h. Property taxes accrued on the shop buildings, $12,600 (credit Accounts Payable). i. Manufacturing overhead cost was applied to jobs. j. Jobs completed during the year had a total production cost of $1,106,000 according to their job cost sheets. k. Revenue (all on account), $1,420,000. Cost of Goods Sold (before any adjustment for underapplied or overapplied overhead), $1,120,000. Cash collections on account from customers, $1,415,000. m. Cash payments on accounts payable, $970,000. Cash payments to employees for salaries and wages, $348,000. Required: 1. Prepare journal entries for the year's transactions. 2. Prepare a T-account for each account in the company's trial balance, and enter the opening balances given above. Post your journal entries to the T-accounts. Prepare new T-accounts as needed. Compute the ending balance in each account. Is manufacturing overhead underapplied or overapplied for the year? Prepare the necessary journal entry to close the balance in the Manufacturing Overhead account to Cost of Goods Sold. 3. ISD Prepare an income statement for the year. (Do not prepare a statement of cost of goods mallu factured: all of the information needed for the income statement is available in the T-accounts.)