Outdoor Athletic Equipment Co. operates two divisions the Winter Sports Division

Question

Outdoor Athletic Equipment Co. operates two divisions the Winter Sports Division and the Summer Sports Division. The following income and expense accounts were provided from the trial balance as of June 30, 2008, the end of the current fiscal year, after all adjustments, including those for inventories, were records and posted:

Sales Winter Sports Div 950,000
Sales Summers Sports Div 1,437,500
Cost of Goods Winter Sports Div 512,500
Cost of Goods Summer Sports Div 687,500
Sales Expense Winter Sports Div 150,000
Sales Expense Summer Sports Div 205,000
Admin Expense Winter Sports Div 97,000
Admin Expense Summer Sports Div 128,000
Advertising Expense 64,500
Transportation Expense 100,700
Accounts Receivable Collection Expense 58,100
Warehouse Expense 120,000

A. Advertising expense incurred at headquarters, charged back to divisions of the basis of usage: Winter sports divisions, 28,000, Summer sports divisions 36,500.

B. Transportation expense charged back to divisions at a transfer price of 7.60 per bill of lading: Winter sports division 6,000 bills of lading, Summer sports division 7,250 bills of lading.

C. Accounts receivable collection expense incurred at headquarters, charged back to divisions at a transfer price of 5.60 per invoice: Winter sports division 4,500 sales invoices, Summer Sports division, 5,875 sales invoices.

D. Warehouse expense charged back to divisions of the basis of floor space used in storing division products: Winter sports division, 25,000 sq ft, Summer sports division 12,500 sq ft.

Prepare a divisional income statement with two column headings: Winter sports division and Summer sports division. Provide supporting schedules for determining service department charges.

Explanation / Answer

Particulars Winter sports division Summer sports division Sales 950000 1437500 Total Revenue (A) 950000 1437500 Less: Cost of goods 512500 687500 Sales expense 150000 205000 Admin expense 97000 128000 Advertising expense 28000 36500 Transportation expense 45600 55100 Accounts receivable collection expense 25200 32900 Warehouse expense 80000 40000 Total Expenses (B) 938300 1185000 Net income (A) - (B) 11700 252500 supporting schedules for determining service department charges. Particulars Winter sports division Summer sports division Advertising expense (given) 28000 36500 Transportation expense 45600 55100 (6000*7.6) (7250*7.6) Accounts receivable collection expense 25200 32900 (4500*5.60) (5875*5.60) Warehouse expense (total floor space =37500 sq ft 80000 40000 (120000*25000/37500) (120000*12500/37500)

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