Kirsoff Company makes eBook readers. The company had the following amounts at the beginning of 2011: Cash, $660,000; Raw Materials Inventory, $51,000; Work in Process Inventory, $18,000; Finished Goods Inventory, $43,000; Common Stock, $583,000; and Retained Earnings, $189,000. Kirsoff experienced the following accounting events during 2011. Other than the adjusting entries for depreciation, assume that all transactions are cash transactions.
1. Paid $23,000 of research and development costs.
2. Paid $47,000 for raw materials that will be used to make eBook readers.
3. Placed $83,000 of the raw materials cost into the process of manufacturing eBook readers.
4. Paid $60,000 for salaries of selling and administrative employees.
5. Paid $91,000 for wages of production workers.
6. Paid $90,000 to purchase equipment used in selling and administrative offices.
7. Recognized depreciation on the office equipment. The equipment was acquired on January, 1, 2011. It has a $10,000 salvage value and a five-year life. The amount of depreciation is computed as [(Cost - salvage) ÷ useful life]. Specifically, ($90,000 - $10,000) ÷ 5 = $16,000.
8. Paid $165,000 to purchase manufacturing equipment.
9. Recognized depreciation on the manufacturing equipment. The equipment was acquired on January 1, 2011. It has a $25,000 salvage value and a seven-year life. The amount of depreciation is computed as [(Cost - salvage) ÷ useful life]. Specifically, ($165,000 - $25,000) ÷ 7 = $20,000.
10. Paid $45,000 for rent and utility costs on the manufacturing facility.
11. Paid $70,000 for inventory holding expenses for completed eBook readers (rental of warehouse space, salaries of warehouse personnel, and other general storage cost).
12. Completed and transferred eBook readers that had total cost of $240,000 from work in process inventory to finished goods.
13. Sold 1,000 eBook readers for $420,000.
14. It cost Kirsoff $220,000 to make the eBook readers sold in Event 13.
a. Show how these events affect the balance sheet, income statement, and statement of cash flows by recording them in a horizontal financial statements model.
b. Explain why Kirsoff’s recognition of cost of goods sold had no impact on cash flow.
c. Prepare a schedule of cost of goods manufactured and sold, a formal income statement, and a balance sheet for the year.
d. Distinguish between the product costs and the upstream costs that Kirsoff incurred.
e. The company president believes that Kirsoff could save money by buying the inventory that it currently makes. The warehouse manager said that would not be a good idea because the purchase price of $230 per unit was above the $220 average cost per unit of making the product. Assuming the purchased inventory would be available on demand, explain how the company could be correct and why the production manager could be biased in his assessment of the option to buy the inventory.