Accounting GBA 5205 Problem 10-26 Service versus manufacturing companies LO 10-4

Question

Accounting GBA 5205

Problem 10-26 Service versus manufacturing companies LO 10-4 Wang Company began operations on January 1, 2018, by issuing common stock for $70,000 cash. During 2018, Wang received $88,000 cash from revenue and incurred costs that required $65,000 of cash payments. Required Prepare a GAAP-based income statement and balance sheet for Wang Company for 2018, under each of the following independent scenarios a. Wang is a promoter of rock concerts. The $65,000 was paid to provide a rock concert that pro- CHECK FIGURES a. Net income: $23,000 b. Total assets: $145,000 c. Net income:$54,500 duced the revenue. b. Wang is in the car rental business. The $65,000 was paid to purchase automobiles. The automobiles were purchased on January 1, 2018, and have five-year useful lives, with no expected salvage value. Wang uses straight-line depreciation. The revenue was generated by leasing the automobiles. Wang is a manufacturing company. The $65,000 was paid to purchase the following items (1) Paid $10,000 cash to purchase materials that were used to make products during the year. (2) Paid $20,000 cash for wages of factory workers who made products during the year (3) Paid $5,000 cash for salaries of sales and administrative employees (4) Paid $30,000 cash to purchase manufacturing equipment. The equipment was used solely to c. make products. It had a three-year life and a $6,000 salvage value. The company uses straight- line depreciation (5) During 2018, Wang started and completed 2,000 units of product. The revenue was earned when Wang sold 1,500 units of product to its customers d. Refer to Requirement c. Could Wang determine the actual cost of making the 500th unit of prod uct? How likely is it that the actual cost of the 500th unit of product was exactly the same as the cost of producing the 501st unit of product? Explain why management may be more interested in average cost than in actual cost.

Explanation / Answer

a.

1 Operating expenses = $65000

2 Cash = $70000 + $88000 - $65000 = $93000

b.

1 Depreciation expense = $65000/5 = $13000

c.

1 The product costs are $10000 for materials, $20000 for labor, and $8000 for overhead. The overhead cost results from depreciation on the manufacturing equipment [i.e., ($30000 cost - $6000 salvage) / 3 year life]. Accordingly, total product costs amount to $38000 (i.e., $10000 + $20000 + $8000). The cost per unit is $19 (i.e., $38000/2000 units). Since 1500 units were sold, ending inventory will be composed of 500 units (i.e., 2000 units - 1500 units). The amount of cost of goods sold is $28500 (i.e., $19 x 1500 units). The balance in ending inventory would be $9500 (i.e., $19 x 500 units).

2 Salaries of sales and administrative employees

d. It is not possible for Wang to determine the actual cost of making the 500th unit. Since the units produced are same the actual cost of the 500th unit would be same as the cost of producing the 501st unit. Management is thus more interested in average cost than actual cost since it is not possible to calculate the actual cost of every unit and the cost is the same for every unit.

Wang Company Income Statement for 2018 Balance Sheet as of 12/31/2018 Sales revenue 88000 Assets Operating expenses1 -65000 Cash2 93000 Net income (loss) 23000 Total assets 93000 Equity Common stock 70000 Retained earnings 23000 Total equity 93000

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