For its most recent year of operations, Unovap Co. had sales of $950,000, cost of goods sold of $680,000, and operating expenses of $190,000. Its ending inventories were as follows:

Raw material .....$30,000

Work in process .....88,000

Finished goods ......32,000

In addition, it has $5,000 of underapplied overhead which has not yet been transferred to any other accounts.

REQUIRED

1. Transfer the underapplied overhead to Cost of Goods Sold and calculate the net income for the year.

2. Spread the underapplied overhead among Work in Process, Finished Goods, and

Cost of Goods Sold, and calculate the net income for the year.

3. (a) What is the difference in the net income based on the two different approaches to accounting for the underapplied overhead?

(b) How would you recommend accounting for the underapplied overhead in this case?