QUESTION 4

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

Supreme Videos, Inc.

Balance Sheet

January 1

Assets

Current assets:

Cash $76,000

Accounts receivable 115,000

Inventories:

Raw materials (film, costumes) $43,000

Videos in process 21,000

Finished videos awaiting sale 94,000 158,000

Prepaid insurance 11,600

Total current assets 360,600

Studio and equipment 756,000

Less accumulated depreciation 223,000 533,000

Total assets $893,600

Liabilities and Stockholders' Equity

Accounts payable $108,600

Capital stock $502,000

Retained earnings 283,000 785,000

Total liabilities and stockholders' equity $893,600

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 company's predetermined overhead rate for the year is based on a cost formula that estimated $200,000 in manufacturing overhead for an estimated allocation base of 4,000 camera-hours. The following transactions occurred during the year:

a. Film, costumes, and similar raw materials purchased on account, $198,000.

b. Film, costumes, and other raw materials used in production, $213,000 (80% of this material was considered direct to the videos in production, and the other 20% was considered indirect).

c. Utility costs incurredon account in the production studio, $85,000.

d. Depreciation recorded on the studio, cameras, and other equipment, $97,000. Three-fourths of this depreciation related to production of the videos, and the remainder related to equipment used in marketing and administration.

e. Advertising expense incurred on account, $143,000.

f. Costs for salaries and wages were incurredon account as follows:

Direct labor (actors and directors) $95,000

Indirect labor (carpenters to build sets,

costume designers, and so forth) $123,000

Administrative salaries $108,000

g. Prepaid insurance expired during the year, $8,300 (75% related to production of videos, and 25% related to marketing and administrative activities).

h. Miscellaneous marketing and administrative expenses incurred on account, $9,900.

i. Studio (manufacturing) overhead was applied to videos in production. The company used 6,800 camera-hours during the year.

j. Videos that cost $563,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.

k. Sales for the year totaled $951,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $613,000.

l. Collections from customers during the year totaled $863,000.

m. Payments to suppliers on account during the year, $513,000; payments to employees for salaries and wages, $320,000.

Required:

1. Prepare a T-account for each account on the company's 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 under applied or over applied 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.