Heavenly Displays Inc. puts together large-scale fireworks displays—primarily for Canada Day celebrations sponsored by corporations and municipalities. The company assembles and orchestrates complex displays using pyrotechnic components purchased from suppliers through- out the world. The company has built a reputation for safety and for the awesome power and brilliance of its computer-controlled shows. Heavenly Displays builds its own launch plat- forms and its own electronic controls. Because of the company’s reputation, customers order shows up to a year in advance. Since each show is different in terms of duration and components used, Heavenly Displays uses a job-order costing system. Heavenly Displays’ trial balance as of January 1, the beginning of the current year, is given below:
The company charges manufacturing overhead costs to jobs on the basis of direct labour- hours. (Each customer order for a complete fireworks display is a separate job.) Management estimated that the company would incur $135,000 in manufacturing overhead costs in the fabrication and electronics shops and would work 18,000 direct labour-hours during the year. The following transactions occurred during the year:
a. Raw materials, consisting mostly of skyrockets, mortar bombs, flares, wiring, and electronic components, were purchased on account: $820,000.
b. Raw materials were issued to production: $830,000 ($13,000 of this amount was for indirect materials, and the remainder was for direct materials).
c. Fabrication and electronics shop payrolls were accrued: $200,000 (70% direct labour and 30% indirect labour). A total of 20,800 direct labour-hours were worked during the year.
d. Selling and administrative salaries were accrued: $150,000.
e. The company prepaid additional insurance premiums of $38,000 during the year. Prepaid insurance expiring during the year was $40,000 (only $600 relates to selling and administrative; the other $39,400 relates to the fabrication and electronics shops because of the safety hazards involved in handling fireworks).
f. Marketing cost was incurred: $100,000.
g. Depreciation charges for the year totalled $40,000 (70% relates to fabrication and electronics shop assets, and 30% relates to selling and administrative assets).
h. Property taxes were accrued on the shop buildings: $12,600 (credit Accounts Payable).
i. Manufacturing overhead cost was applied to jobs.
j. Jobs completed during the year had a total production cost of $1,106,000 according to their job cost sheets.
k. Revenue (all on account) was $1,420,000. Cost of Goods Sold (before any adjustment for underapplied or overapplied overhead) was $1,120,000.
l. Cash collections on account from customers totalled $1,415,000.
m. Cash payments on accounts payable totalled $970,000. Cash payments to employees for salaries and wages totalled $348,000.
1. Prepare journal entries for the year’s transactions.
2. Prepare a T-account for each account in the company’s trial balance, and enter the opening balances given above. Post your journal entries to the T-accounts. Prepare new T-accounts as needed. Compute the ending balance in each account.
3. Is manufacturing overhead underapplied or overapplied for the year? Prepare the necessary journal entry to dispose of the balance in the Manufacturing Overhead account.
4. Prepare an income statement for the year. (Do not prepare a statement of cost of goods manufactured; all of the information needed for the income statement is available in the T-accounts.)

  • CreatedJuly 08, 2015
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