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Problem 16.12A

Effect on Income Statement of Errors in Handling Manufacturing Costs

John Bronx, the chief accountant of NY Banjo Company, was injured in an automobile accident shortly before the end of the company’s first year of operations.  At year-end, a clerk with a very limited understanding of accounting prepared the following income statement, which is unsatisfactory in several respects:

NY BANJO COMPANY

Income Statement

For the Year Ended December 31, 20__

Net sales$1,250,000

Cost of goods sold:

Purchases of direct materials$430,000

Direct labor200,000

Indirect labor100,000

Depreciation on machinery – factory 40,000

Rent130,000

Insurance20,000

Utilities30,000

Miscellaneous manufacturing overhead50,000

Other operating expenses300,000

Dividends declared on capital stock40,000

Cost of goods sold$1,340,000

Loss for year    (90,000)

You are asked to help management prepare a corrected income statement for the first year of operations.  Management informs you that 70% of the rent, insurance, and utilities applies to factory operations, and that the remaining 30% should be classified as period expense.  Also, the correct ending inventories are as follows:

Material$  50,000

Work in process30,000

Finished goods125,000

As this is the first year of operations, there were no beginning inventories.

16-12Alternate Problems for use with Financial and Managerial Accounting, 12e

© The McGraw-Hill Companies, 2002

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