Chapter 10, Problem 26P

a.

To determine

The balance sheet and income statement of Company W according to GAAP.

Answer to Problem 26P

The calculation of income statement of Company W is as follows:

Table (1)

Hence, the net income of Company W is $23,000.

The calculation of balance sheet of Company W is as follows:

Table (2)

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

Balance sheet is one of the financial statements that summarize the assets, the liabilities, and the shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Working notes:

The entire $65,000 is treated as operating expenses.

(1)

The total cash is calculated as follows:

$\begin{array}{c}\text{Total cash}=\text{Acquired capital}+\text{Sales revenu}-\text{Spendings}\\ =\$70,000+\$88,000-\$65,000\\ =\$70,000+23,000\\ =\$93,000\end{array}$

Hence, the total cash is $93,000.

(2)

b.

To determine

The balance sheet and income statement of Company W according to GAAP.

Answer to Problem 26P

The calculation of income statement of Company W is as follows:

Table (3)

Hence, the net income of Company W is $75,000.

The calculation of balance sheet of Company W is as follows:

Table (4)

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

Balance sheet is one of the financial statements that summarize the assets, the liabilities, and the shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Working notes:

The depreciation is calculated as follows:

$\begin{array}{c}\text{Depreciation}=\frac{\text{Automobiles purchased}}{\text{Number of years}}\\ =\frac{\$65,000}{5}\\ =\$13,000\end{array}$

Hence, the depreciation is $13,000.

(3)

The depreciation amount $13,000 must be adjusted in the balance sheet as accumulated depreciation.

(4)

c.

To determine

The balance sheet and income statement of Company W according to GAAP.

Answer to Problem 26P

The calculation of income statement of Company W is as follows:

Table (5)

Hence, the net income of Company W is $54,500.

The calculation of balance sheet of Company W is as follows:

Table (6)

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

Balance sheet is one of the financial statements that summarize the assets, the liabilities, and the shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Working notes:

The depreciation on the manufacturing equipment is calculated as follows:

$\begin{array}{c}\text{Depreciation}=\frac{\text{Manufacturing equipment}-\text{Salvage value}}{\text{Number of years}}\\ =\frac{\$30,000-6000}{3}\\ =\frac{\$24,000}{3}\\ =\$8,000\end{array}$

Hence, the depreciation cost is $8,000.

The cost per unit is calculated as follows:

$\begin{array}{c}\text{Cost per unit}=\frac{\text{Materials}+\text{Labor}+\text{Overheads (depreciation on equipments)}}{\text{Total number of units produced}}\\ =\frac{\$10,000+\$20,000+\$8000}{2000\text{ units}}\\ =\frac{\$38,000}{2000\text{ units}}\\ =\$19\end{array}$

Hence, the cost per unit is $19.

Calculate the cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold}=\text{Cost per unit}\times \text{Number of goods sold}\\ =\$19\times 1500\text{ units}\\ =\$28,500\end{array}$

Hence, the cost of goods sold is $28,500.

(5)

The total finished goods are calculated as follows:

$\begin{array}{c}\text{Finished goods}=\text{Cost per unit}\times \text{Completed goods}-\text{Number of goods sold}\\ =\$19\times 2000\text{ units}-1500\text{ units}\\ =\$19\times 500\text{ units}\\ =\$9,500\end{array}$

Hence, the finished goods are $9,500.

(6)

The depreciation on the manufacturing equipment is calculated as follows:

$\begin{array}{c}\text{Depreciation}=\frac{\text{Manufacturing equipment}-\text{Salvage value}}{\text{Number of years}}\\ =\frac{\$30,000-6000}{3}\\ =\frac{\$24,000}{3}\\ =\$8,000\end{array}$

Hence, the accumulated depreciation cost is $8,000.

(7)

d.

To determine

Explain the reason why management might be more interested in average cost than the actual cost.

Explanation of Solution

The exact cost of the product cannot be determined because the labor and material usage will differ among the same products. Cost average is an element that smoothens these differences.