Supreme Videos, Inc., produces short musical videos for sale to retail
outlets. The company's balance sheet accounts as of January 1, the
beginning of its fiscal year, are given below. 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 $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. The following transactions were recorded for the year:
Film, costumes, and similar raw materials purchased on account,
$185,000. Film, costumes, and other raw materials issued to production, $200,000 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect). Utility costs incurred in the production studio, $72,000.

a. b.

c.

2

Depreciation recorded on the studio, cameras, and other equipment, $84,000. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration. Advertising expense incurred, $130,000. Costs for salaries and wages were incurred as follows:

Prepaid insurance expired during the year, $7,000 (80% related to

production of videos, and 20% related to marketing and administrative

activities). Miscellaneous marketing and administrative expenses incurred, $8,600. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year. Videos that cost $550,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.

Sales for the year totaled $925,000 and were all on account. The total

cost to produce these videos according to their job cost sheets was

$600,000.

Collections from customers during the year totaled $850,000. Payments to suppliers on account during the year, $500,000; payments to employees for salaries and wages, $285,000.

Required:

1. PrepareaT-accountforeachaccountonthecompany'sbalance

sheet and enter the beginning balances. 2. RecordthetransactionsdirectlyintotheT-accounts.Preparenew

T-accounts as needed. Key your entries to the letters (a) through

(m) above. Compute the ending balance in each account.

3. Is the Studio (manufacturing) Overhead account underapplied or

   overapplied for the year? Make an entry in the T-accounts to close any balance in the Studio Overhead account to Cost of Goods Sold.

4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of the information needed for the income statement is available in the T-accounts.)

Supreme Videos, Inc. Balance Sheet January 1 Assets Current assets: S 63,000 102.000 Accounts receivable Inventories: . .. Raw materials (film, costumes) 30,000 45,000 81,000 Videos in process . Finished videos awaiting sale. Prepaid insurance Total current assets 156,000 9,000 330,000 . ..._.... 730,000 210,000 Less accumulated depreciation Total assets 520,000 $850,000 Liabilities and Stockholders Equity $160,000 Capital stock Retained earnings $420,000 270,000 690,000 $850,000 . Total liabilities and stockholders' equity. Depreciation recorded on the studio, cameras, and other equipm $84,000. Three-fourths of this depreciation related to actual pro of the videos, and the remainder related to equipment used in marketing and administration Advertising expense incurred, $130,000 Costs for salaries and wages were incurred as follows: Direct labor (actors and directors) Indirect labor (carpenters to build sets $82,000 costume designers, and so forth) Administrative salaries . . . . $110,000 $95,000 Prepaid insurance expired during the year, $7,000 (80% related production of videos, and 20% related to marketing and adminis activities) Miscellaneous marketing and administrative expenses incurred $8,600 Studio (manufacturing) overhead was applied to videos in produ The company recorded 7,250 camera-hours of activity during th