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CH 04 SM
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CHAPTER 4
DISCUSSION QUESTIONS
The income statement is primarily a measure of what has been earned, and not a
measure of earning power. For plant assets,
the balance sheet is primarily a measure of
accountability for expenditures, showing
acquisition costs less costs allocated to past
operations. This measure of accountability
may be quite different from true value.
To increase its usefulness as one element
in judging earning power, the income statement is prepared with a distinction between
operating and nonoperating items. For the
same reason, certain items may be eliminated
from the income statement and shown in the
statement of retained earnings. However, the
effect of nonrecurring and nonoperating transactions is not entirely eliminated.
Information revealed by a series of
income statements is more significant in
judging earning power than information
revealed by one income statement. The
income of a business may follow or even
exaggerate the ups and downs of the business cycle and, therefore, the income of any
one year will not represent earning power.
Changes in law or local zoning ordinances
may result in a marked change in the earning
power of a business. Likewise, changes in
public taste, development of new products,
appearance of new competition, acquisition of
subsidiaries, changes in management and
the like, all may change earning power and
yet not be clearly reflected, if reflected at all,
in one income statement.
The accounting use of historical, rather
than current, dollars in measuring depreciation and cost of goods sold may result in distorting any view of earning power obtained
from a single income statement.
In regard to plant assets, it can be said that
their value to a going concern is usually
dependent upon the earning power of the
business. Such a value is not necessarily the
same as liquidation value, cost, cost less
amortization, replacement value, or any other
4-1
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4-2
Q4-4.
Q4-5.
Q4-6.
Q4-7.
Q4-8.
Q4-9.
Q4-10.
Chapter 4
Q4-11.
Q4-12.
Q4-13.
Q4-14.
Q4-15.
Q4-16.
Q4-17.
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Chapter 4
4-3
EXERCISES
E4-1
E4-2
$110
80
$190
90
$100
150
$250
120
$130
$ 90
60
80
$230
250
$480
210
$270
340
$610
300
$310
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4-4
E4-3
(1)
(2)
Chapter 4
Direct materials:
Direct materials inventory, beginning................
Purchases.............................................................
Direct materials available for use ......................
Less direct materials inventory, ending ............
Direct materials consumed ................................
Direct labor....................................................................
Factory overhead..........................................................
Total manufacturing cost.............................................
Add work in process inventory, beginning ................
$ 37,500
160,000
$197,500
43,500
$154,000
120,000
108,000
$382,000
61,500
$443,500
57,500
$386,000
$386,000
27,000
$413,000
26.000
$387,000
E4-4
(1)
$22,000
11,220
18,500
2,000
16,920
5,000
2,750
$78,390
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Chapter 4
4-5
E4-4 (Concluded)
(2)
(3)
$ 10,250
105,000
$115,250
12,700
$102,550
93,500
78,390
$274,440
60,420
$334,860
52,800
$282,060
Cost of
goods
manufactured
Finished
goods,
May 31
Cost of
goods
sold
$45,602
$282,060
$280,000
$ 47,662
(a)
(b)
(c)
(d)
(e)
(f)
Materials ...............................................................
Accounts Payable .......................................
40,000
Work in Process...................................................
Factory Overhead Control ..................................
Materials ......................................................
33,000
2,000
Payroll ...................................................................
Accrued Payroll ..........................................
40,000
40,000
Work in Process...................................................
Factory Overhead control...................................
Payroll ..........................................................
32,000
8,000
4,000
40,000
35,000
40,000
40,000
40,000
4,000
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4-6
Chapter 4
E4-5 (Concluded)
(g)
(h)
(i)
(j)
(k)
E4-6
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
18,000
4,130
Work in Process...................................................
Factory Overhead Control .........................
36,130
92,000
80,000
Cash ......................................................................
Accounts Receivable .................................
40,000
60,000
Materials ...............................................................
Accounts Payable .......................................
13,500
Work in Process...................................................
Materials ......................................................
17,500
1,800
Payroll ...................................................................
Accrued Payroll ..........................................
27,000
Work in Process...................................................
Factory Overhead Control ..................................
Marketing Expenses Control ..............................
Administrative Expenses Control ......................
Payroll ..........................................................
17,000
2,000
5,000
3,000
2,508
8,500
Work in Process...................................................
Factory Overhead Control .........................
14,808
60,100
18,000
2,100
780
1,250
36,130
92,000
80,000
40,000
60,000
13,500
17,500
1,800
27,000
27,000
2,508
8,500
14,808
60,100
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Chapter 4
4-7
E4-6 (Concluded)
(i)
75,000
60,000
75,000
60,000
E4-7
WALLACE INDUSTRIES
Cost of Goods Manufactured Statement
For May
(in thousands of dollars)
Direct materials:
Direct materials, April 30, 20A ..........................
Purchases...........................................................
Freight in ...........................................................
Direct materials available for use.....................
Less direct materials, May 31, 20A ..................
Direct materials consumed......................
Direct labor .....................................................................
Factory overhead:
Indirect factory labor.........................................
Utilities ($135 80%) .........................................
Property tax........................................................
Insurance ($20 60%) .......................................
Depreciation ($20 + $30) ...................................
$ 28
$510
15
525
$553
23
$ 530
260
$ 90
108
60
12
50
320
$1,110
150
$1,260
210
$1,050
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4-8
Chapter 4
E4-8
CINNABAR COMPANY
Statement of Cost of Goods Sold
For Year Ended December 31
Raw materials:
Purchases..................................................
Less discounts on raw
materials purchased ...............
Less raw materials on hand,
December 31, 20A............................
Cost of raw materials consumed ............
Direct labor.........................................................
Factory overhead:
Factory maintenance................................
Factory supplies used..............................
Power and heatfactory..........................
Insurance expensefactory
building and equipment ..................
Depreciationfactory building
and equipment .................................
Factory superintendence .........................
Indirect factory labor ................................
Total factory overhead ....................
Total manufacturing costs ................................
Add work in process, January 1, 20A ..............
$400,000
4,200
$395,800
24,000
$371,800
180,000
$ 38,400
22,400
19,400
4,800
17,500
100,000
20,000
222,500
$774,300
84,000
$858,300
30,000
$828,300
37,500
$865,800
$795,800
70,000
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Chapter 4
4-9
PROBLEMS
P4-1
(1)
BEERTON COMPANY
Cost of Goods Sold Statement
For Month Ended July 31
(in thousands)
Direct materials consumed .................................................................
Direct labor ...........................................................................................
Factory overhead .................................................................................
$16
24
20
$60
15
$75
25
$50
20
$70
10
$60
Calculations:
(a)
Cost of goods manufactured ....................
Add work in process, ending ....................
$50
25
$75
15
$60
$70
50
$20
$70
60
$10
(b)
(c)
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4-10
Chapter 4
P4-1 (Concluded)
(2)
(a)
(b)
(c)
(d)
(e)
(f)
Materials ...............................................................
Accounts Payable .......................................
25,000
Work in Process...................................................
Factory Overhead Control ..................................
Materials ......................................................
16,000
2,000
29,000
Work in Process...................................................
Factory Overhead Control ..................................
Payroll ..........................................................
24,000
5,000
50,000
105,000
60,000
25,000
18,000
29,000
29,000
50,000
105,000
60,000
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Chapter 4
4-11
P4-2
(1)
SOUTHTON COMPANY
Cost of Goods Sold Statement
For Month Ended June 30
(in thousands)
Direct materials:
Materials inventory, June 1 ...............................
Purchases...........................................................
Materials available for use ................................
Less: Indirect materials used .........................
Materials inventory, June 30 ................
$15
33
$48
$ 1
19
20
$28
42
$ 1
7
17
2
13
40
$110
40
$150
30
$120
70
$190
50
140
Calculations:
(a)
indirect labor
indirect labor
indirect labor
indirect labor
direct labor =
(b)
+ direct labor
+ (indirect labor 6)
7 = $49
= $7
6 $7 = $42
= $49
= $49
$120
30
$150
40
$110
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4-12
Chapter 4
P4-2 (Concluded)
(2)
(c)
$190
120
$ 70
(d)
$190
140
$ 50
(a)
Materials ...............................................................
Accounts Payable .......................................
33,000
Work in Process...................................................
Factory Overhead Control ..................................
Materials ......................................................
28,000
1,000
Payroll ...................................................................
Accrued Payroll ..........................................
49,000
Work in Process...................................................
Factory Overhead Control ..................................
Payroll ..........................................................
42,000
7,000
120,000
210,000
140,000
(b)
(c)
(d)
(e)
(f)
33,000
29,000
49,000
49,000
120,000
210,000
140,000
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Chapter 4
4-13
P4-3
(1)
MERTON COMPANY
Schedule of Cost of Goods Manufactured
For Month Ended March 31
Work in process, March 1 ............................................
Production costs:
Direct materials....................................................
Direct labor...........................................................
Factory overhead.................................................
$ 50,000
$104,000 **
160,000 ***
80,000 ***
344,000
$394,000
46,000
$348,000*
(3)
=
=
=
=
direct labor
$240,000
$160,000 direct labor
$80,000 factory overhead
Prime cost:
Direct materials (requirement (1))...............................
Direct labor (requirement (1))......................................
Conversion cost:
Direct labor (requirement (1))......................................
Factory overhead (requirement (1)) ............................
$104,000
160,000
$264,000
$160,000
80,000
$240,000
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4-14
Chapter 4
P4-4
Company A:
Sales ..............................................................................
Cost of goods sold:
Finished goods inventory, January 1 ................
Cost of goods manufactured .............................
$ 600,000
3,800,000
$4,400,000
1,200,000
$4,000,000
3,200,000
$ 800,000
Company B:
Cost of goods available for sale .................................
Less finished goods ending inventory.......................
$1,490,000
190,000
$1,300,000
Company C:
Sales ..............................................................................
Cost of goods sold:
Cost of goods manufactured .............................
Add beginning finished goods inventory .........
$ 340,000
45,000
$ 385,000
52,000
$ 429,000
333,000
$ 96,000
P4-5
Finished Goods
Beg.
34,000
(4)
346,000
380,000
End. 30,000
350,000
Work in Process
Beg.
7,000
M
50,000
L(2)
200,000
FOH
100,000
357,000
End. 11,000
(8)
Accrued Payroll
259,000 Beg.
346,000
13,000
55,000
200,000
268,000
End. 9,000
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Chapter 4
4-15
P4-5 (Concluded)
Accounts Receivable
Beg.
54,000
(7)
532,000
500,000
554,000
End. 22,000
(6)
55,000
200,000
255,000
Accounts Payable
77,000 Beg.
18,000
65,000
83,000
End. 6,000
Sales
500,000
(5)
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4-16
Chapter 4
P4-6
Work in Process ...........................................................
Materials .............................................................
Cost of goods sold ............................................
Add finished goods inventory increase ..........
84,000
84,000
$140,000
17,000
$159,000
$84,000
75,000
Materials ..........................................................................
Accounts Payable ..............................................
91,000
91,000
$84,000
7,000
$ 91,000
Payroll .............................................................................
Accrued Payroll..................................................
40,000
40,000
35,000
35,000
40,000
40,000
35,000
35,000
157,000
157,000
140,000
140,000
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Chapter 4
4-17
P4-7
(1) and (2)
(a)
Materials ...............................................................
Accounts Payable .......................................
92,000
26,530
Payroll ...................................................................
Accrued Payroll ..........................................
86,000
Work in Process...................................................
Factory Overhead Control ..................................
Marketing Expenses Control ..............................
Administrative Expenses Control ......................
Payroll ..........................................................
60,500
12,500
8,000
5,000
88,250
(d)
Work in Process...................................................
Factory Overhead Control ..................................
Materials ......................................................
82,500
8,300
Work in Process...................................................
Factory Overhead Control .........................
47,330
188,000
241,150
185,500
Cash ......................................................................
Sales Discounts...................................................
Accounts Receivable .................................
208,662
4,258
18,000
12,000
104,000
(b)
(c)
(e)
(f)
(g)
(h)
(i)
(j)
92,000
26,530
86,000
86,000
88,250
90,800
47,330
188,000
241,150
185,500
212,920
30,000
104,000
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4-18
Chapter 4
P4-7 (Continued)
Cash
1/1 Bal.
20,000
(c)
(h)
208,662
(j)
228,662
36,412
88,250
104,000
192,250
Accounts Receivable
1/1 Bal.
25,000
(h)
212,920
(g)
241,150
266,150
53,230
Finished Goods
1/1 Bal.
9,500
(g)
(f)
188,000
197,500
12,000
1/1 Bal.
(c)
(d)
(e)
(c)
Work in Process
4,500
(f)
60,500
82,500
47,330
194,830
6,830
Accrued Payroll
88,250
1/1 Bal.
(c)
Sales
(g)
(h)
(c)
(i)
1/1 Bal.
188,000
(j)
(g)
(c)
60,000
Machinery
40,000
Accounts Payable
104,000 1/1 Bal.
(a)
(b)
(i)
15,500
92,000
26,530
30,000
164,030
60,030
Retained Earnings
1/1 Bal.
2,250
86,000
241,150
90,800
Accumulated Depreciation
1/1 Bal.
10,000
185,500
Sales Discounts
4,258
Common Stock
1/1 Bal.
Materials
1/1 Bal.
10,000 (d)
(a)
92,000
102,000
11,200
21,250
(b)
(c)
(d)
(c)
(i)
86,000
47,330
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Chapter 4
4-19
P4-7 (Concluded)
(3)
STEPHANOWICZ COMPANY
Trial Balance
January 31
Cash ...........................................................................................
Accounts Receivable ................................................................
Finished Goods .........................................................................
Work in Process ........................................................................
Materials.....................................................................................
Machinery ..................................................................................
Accounts Payable......................................................................
Accumulated Depreciation .......................................................
Common Stock..........................................................................
Retained Earnings.....................................................................
Sales ...........................................................................................
Sales Discounts ........................................................................
Cost of Goods Sold .................................................................
Marketing Expenses Control....................................................
Administrative Expenses Control............................................
$36,412
53,230
12,000
6,830
11,200
40,000
$ 60,030
10,000
60,000
21,250
241,150
4,258
185,500
26,000
17,000
$392,430
$392,430