Financial & Managerial Accounting
Financial & Managerial Accounting
18th Edition
ISBN: 9781260006520
Author: williams
Publisher: MCG
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Chapter 16, Problem 1CTC

a.

To determine

Identify the shortcomings and errors in the income statement, and explain the company’s actual net income for the first year would be higher or lower than the amount shown in the income statement.

a.

Expert Solution
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Explanation of Solution

Identify the shortcomings and errors in the income statement, and explain the company’s actual net income for the first year would be higher or lower than the amount shown in the income statement as follows:

  • Manufacturing costs: All manufacturing costs incurred during the first year of operating have incorrectly included in the cost of goods sold, because the portion of these costs would applicable to the ending inventories, and it should be deducted from the cost of goods sold to ascertain the corrected net income/(loss).
  • Dividends declared on capital stock: Dividends declared on capital sock have incorrectly offset against revenue to ascertain the net income/ (loss). Dividends are not an operating expense and it should not be deducted from the revenue.
  • Period costs: Period costs incurred during the year have incorrectly included in the cost of goods sold, because period costs are not related to inventory, hence these cost should not be added to the cost of goods sold. Therefore, these period cost would be decreased the value of net income/ (loss).

b.

To determine

Prepare the schedules to ascertain 1. The cost of direct material used, and 2. total manufacturing overhead.

b.

Expert Solution
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Explanation of Solution

Direct material: Direct material cost is the cost of material that is directly involved in the production.

Manufacturing overhead: Manufacturing overhead is the expenses that are directly involved in the production process.

Prepare the schedules to ascertain 1. The cost of direct material used, and 2. The total manufacturing overhead as follows:

1. The cost of direct material used:

Particulars$
Purchases of direct materials460,000
Less: Material inventory, end of year38,000
Cost of direct materials used422,000

Table (1)

Therefore, the cost of direct material used during the year is $422,000.

2. Total manufacturing overhead:

Particulars $
Total manufacturing overhead: 
Indirect labor90,000
Depreciation on machinery50,000
Rent (1)86,400
Insurance (2)9,600
Utilities (3)16,800
Miscellaneous manufacturing overhead34,600
Total manufacturing overhead287,400

Table (2)

Therefore, the total manufacturing overhead during the year is $287,400.

Working note:

Calculate the value of rent applies to the factory operations

Rent applies to the factory operations} = [Total rent value ×Percentage of rent applies to factory operation]=$144,000×60100=$86,400 (1)

Calculate the value of insurance applies to the factory operations

Insurance applies to the factory operations} = [Total insurance value ×Percentage of insurance applies to factory operation]=$16,000×60100=$9,600 (2)

Calculate the value of utilities applies to the factory operations

Utilities applies to the factory operations} = [Total utilitiesvalue ×Percentage of insurance applies to factory operation]=$28,000×60100=$16,800 (3)

c.

To determine

Prepare a schedule of cost of finished goods manufactured during the year.

c.

Expert Solution
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Explanation of Solution

Prepare a schedule of cost of finished goods manufactured during the year as follows:

Company W
Schedule of the Cost of Finished Goods Manufactured
For the Year Ended December 31
Particulars $ $
 Manufacturing costs assigned to production:  
Direct materials used [refer part b (1)]422,000
Direct labor225,000
Manufacturing overhead [ refer part b (2)]287,400
 Total manufacturing costs934,400
 Less: Work in process inventory, end of year10,000
 Cost of finished goods manufactured924,400

Table (3)

Therefore, the cost of finished goods manufactured of Company W during the year is $924,400.

d.

To determine

Prepare a corrected income statement for the year, using a multiple step format.

d.

Expert Solution
Check Mark

Explanation of Solution

Prepare a corrected income statement for the year, using a multiple step format as follows:

Company W
Income Statement
For the Year Ended December 31
Particulars$$
 Net sales1,300,000
 Add: Cost of goods sold:
Cost of finished goods manufactured924,400
Less: Ending finished goods inventory110,400
Cost of goods sold814,000
 Gross profit on sales486,000
 Less: Operating expenses:
Rent (4)57,600
Insurance (5)6,400
Utilities (6)11,200
Other operating expenses273,800
Total operating expenses349,000
 Income from operations137,000
 Less: Income taxes (7)41,100
Net income95,900

Table (4)

Therefore, the corrected net income of Company W is $95,900.

Working note:

Calculate the value of rent applies to the period cost

Rent applies to the period cost} = [Total rent value ×Percentage of rent applies to period cost]=$144,000×40100=$57,600 (4)

Calculate the value of insurance applies to the period cost

Insurance applies to the period cost} = [Total insurance value ×Percentage of insurance applies to period cost]=$16,000×40100=$6,400 (5)

Calculate the value of utilities applies to the period cost

Utilities applies to the period cost} = [Total utilitiesvalue ×Percentage of insurance applies to period cost]=$28,000×40100=$11,200 (6)

Calculate the income tax expense incurred during the year

Income taxe expense = [Income from operations × Income tax rate]=$137,000×30100=$41,100 (7)

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Chapter 16 Solutions

Financial & Managerial Accounting

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