Question

Cavallo Mfg.’s computer system generated the following trial balance on December 31, 2017. The company’s manager knows that the trial balance is wrong because it does not show any balance for Work in Process Inventory but does show a balance for the Factory Overhead account. In addition, the accrued factory payroll (Factory Wages Payable) has not been recorded.

Debit Credit

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(  64,000

Accounts receivable . . . . . . . . . . . . . . . . . . 42,000

Raw materials inventory . . . . . . . . . . . . . . . 26,000

Work in process inventory . . . . . . . . . . . . . . 0

Finished goods inventory . . . . . . . . . . . . . . 9,000

Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . 3,000

Accounts payable . . . . . . . . . . . . . . . . . . . . \) 10,500

Notes payable . . . . . . . . . . . . . . . . . . . . . . . 13,500

Common stock . . . . . . . . . . . . . . . . . . . . . . . 30,000

Retained earnings . . . . . . . . . . . . . . . . . . . . 87,000

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . 105,000

Factory overhead . . . . . . . . . . . . . . . . . . . . 27,000

Operating expenses . . . . . . . . . . . . . . . . . . 45,000

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(321,000 \)321,000

After examining various files, the manager identifies the following six source documents that need to be processed to bring the accounting records up to date.

Materials requisition 94-231: \(4,600 direct materials to Job 603

Materials requisition 94-232: \)7,600 direct materials to Job 604

Materials requisition 94-233: \(2,100 indirect materials

Labor time ticket 765: \)5,000 direct labor to Job 603

Labor time ticket 766: \(8,000 direct labor to Job 604

Labor time ticket 777: \)3,000 indirect labor

Jobs 603 and 604 are the only units in process at year-end. The predetermined overhead rate is 200% of direct labor cost.

Required

1. Use information on the six source documents to prepare journal entries to assign the following costs.

a. Direct materials costs to Work in Process Inventory.

b. Direct labor costs to Work in Process Inventory.

c. Overhead costs to Work in Process Inventory.

d. Indirect materials costs to the Factory Overhead account.

e. Indirect labor costs to the Factory Overhead account.

2. Determine the revised balance of the Factory Overhead account after making the entries in part 1. Determine whether there is any under- or overapplied overhead for the year. Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold, assuming the amount is not material.

3. Prepare a revised trial balance.

4. Prepare an income statement for 2017 and a balance sheet as of December 31, 2017.

Analysis Component

5. Assume that the $2,100 on materials requisition 94-233 should have been direct materials charged to Job 604. Without providing specific calculations, describe the impact of this error on the income statement for 2017 and the balance sheet at December 31, 2017.

Short answer

All the answers are presented as required in the question.

Step-by-step solution

Recording journal entries

Date	Particulars	Debit ($)	Credit ($)
a	WIP Inventory (4,600+7,600)	12,200
	Raw Material Inventory		12,200
	(Direct Materials costs assigned to WIP)
b	WIP Inventory (5,000+8,000)	13,000
	Factory Wages Payable		13,000
	(Direct Labor costs assigned to WIP)
c	WIP Inventory (200% x 13,000)	26,000
	Factory Overhead		26,000
	(Overhead costs assigned to WIP)
d	Factory Overhead	2,100
	Raw Material Inventory		2,100
	(Indirect materials cost assigned to factory Overhead)
e	Factory Overhead	3,000
	Factory Wages Payable		3,000
	(Indirect labor costs assigned to factory overhead)

Computation of revised balance of factory overhead and recording it

Factory Overhead
Balance 27,000
Indirect Materials 2,100	26,000 Overhead Applied
Indirect Labor 3,000
Ending Balance 6,100

Date	Particulars	Debit ($)	Credit ($)
	Cost of Goods sold	6,100
	Factory Overhead		6,100
	(underapplied overheads closed to cost of goods sold)

Preparation of trial balance

Bergamo Bay Company
Trial Balance
December 31, 2017
	Debit ($)	Credit ($)
Cash	64,000
Accounts Receivables	42,000
Raw Materials Inventory	11,700
WIP Inventory	51,200
Finished Goods Inventory	9,000
Prepaid Rent	3,000
Accounts Payable		10,500
Factory wages payable		16,000
Notes Payable		13,500
Common Stock		30,000
Retained Earnings		87,000
Sales		180,000
Cost of goods sold	111,100
Factory Overhead	0
Operating Expenses	45,000
Total	337,000	337,000

Preparation of Income statement and balance sheet

Bergamo Bay Company
Income Statement
December 31, 2017
	Amount ($)	Amount ($)
Sales		180,000
Cost of goods sold		111,100
Gross Profit		68,900
Operating Expense		45,000
Net Income		23,900

Bergamo Bay Company
Balance Sheet
December 31, 2017
	Amount ($)	Amount ($)
Assets
Cash		64,000
Accounts Receivables		42,000
Inventories:
Raw Material	11,700
WIP	51,200
Finished Goods	9,000	71,900
Prepaid Rent		3,000
Total Assets		180,900
Liabilities and Equity
Notes Payable		13,500
Accounts Payable		10,500
Factory Wages payable		16,000
Total Liabilities		40,000
Common Stock		30,000
Retained Earnings		110,900
Total Equity		140,900
Total liabilities and Equity		180,900

Analysis

The impact of direct materials of $2,100 being recorded as indirect materials will result in the ending work in process inventory being understated on the balance sheet and the cost of goods sold being overstated on the income statement.