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 $72,000

Accounts receivable 111,000

Inventories:

Raw materials (film, costumes) $39,000

Videos in process 31,000

Finished videos awaiting sale 90,000 160,000

Prepaid insurance 10,800

Total current assets 353,800

Studio and equipment 748,000

Less accumulated depreciation 219,000 529,000

Total assets $882,800

Liabilities and Stockholders' Equity

Accounts payable $174,800

Capital stock $429,000

Retained earnings 279,000 708,000

Total liabilities and stockholders' equity $882,800

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 $315,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. The following transactions occurred during the year:

a. Film, costumes, and similar raw materials purchased on account, $194,000.

b.Film, costumes, and other raw materials used in production, $209,000 (75% of this material was considered direct to the videos in production, and the other 25% was considered indirect).

c.Utility costs incurred in the production studio, $81,000.

d.Depreciation recorded on the studio, cameras, and other equipment, $93,000. 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, $139,000.

f.Costs for salaries and wages were incurred as follows:

Direct labor (actors and director) $91,000

Indirect labor (carpenters to build sets,

costume designers, and so forth) $119,000

Administrative salaries $104,000

g.Prepaid insurance expired during the year, $7,900 (70% related to production of videos, and 30% related to marketing and administrative activities).

h.Miscellaneous marketing and administrative expenses incurred, $9,500.

i.Studio (manufacturing) overhead was applied to videos in production. The company used 8,000 camera-hours during the year.

j.Videos that cost $559,000 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 $943,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $609,000.

L.Collections from customers during the year totaled $859,000.

m.Payments to suppliers on account during the year, $509,000; payments to employees for salaries and wages, $300,000.

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 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.