Star Videos, Inc., produces short musical videos for sale to retail outlets. The

Question

Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below.

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 ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year:

Film, costumes, and similar raw materials purchased on account, $229,000.

Film, costumes, and other raw materials issued to production, $230,500 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).

Utility costs incurred (on account) in the production studio, $92,600.

Depreciation recorded on the studio, cameras, and other equipment, $104,400. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.

Advertising expense incurred (on account), $143,000.

Salaries and wages paid in cash as follows:

Prepaid insurance expired during the year, $7,450 (70% related to production of videos, and 30% related to marketing and administrative activities).

Miscellaneous marketing and administrative expenses incurred (on account), $13,850.

Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.

Videos that cost $578,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.

Sales for the year totaled $954,000 and were all on account.

The total cost to produce the videos that were sold according to their job cost sheets was $623,910.

Collections from customers during the year totaled $904,000.

Payments to suppliers on account during the year, $608,000.

Underapplied or overapplied overhead $__?__.

Required:

1. Prepare a transaction analysis that records all of the above transactions.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

Star Videos, Inc. Balance Sheet January 1 Assets Cash $ 89,200 Accounts receivable 106,600 Inventories: Raw materials (film, costumes) $ 13,400 Videos in process 47,400 Finished videos awaiting sale 80,400 141,200 Prepaid insurance 8,350 Studio and equipment (net) 610,000 Total assets $ 955,350 Liabilities and Stockholders’ Equity Accounts payable $ 238,000 Retained earnings 717,350 Total liabilities and stockholders’ equity $ 955,350

Explanation / Answer

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Star Videos, Inc. Transaction Analysis For the Year Ended December 31 Cash Accounts Receivable Raw Materials Videos in Process Finished Videos Manufacturing Overhead Prepaid Insurance Studio & Equipment (net) = Accounts Payable Retained Earnings Beginning balance @ 1/1 89200 106600 13400 47400 80400 0 8350 610000 = 238000 717350 Raw material purchases 229000 = 229000 Raw materials used -230500 195925 34575 = Utility costs 92600 = 92600 Depreciation charges 78300 -104400 = -26100 Advertising = 143000 -143000 Salaries & wages -274500 96000 75500 = -103000 Prepaid insurance expired 5215 -7450 = -2235 Miscellaneous marketing = 13850 -13850 Applied overhead 290000 -290000 = Transfer completed videos to finished goods -578000 578000 = Sales 954000 = 954000 Transfer finished goods to cost of goods sold -623910 = -623910 Cash collections from customers 904000 -904000 = Payment to suppliers -608000 = -608000 Overapplied overhead 3810 = 3810 Ending balances @12/31 110700 156600 11900 51325 34490 0 900 505600 = 108450 763065

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