The following events took place for Chi-Lite Inc. during June 2016, the first mo

Question

The following events took place for Chi-Lite Inc. during June 2016, the first month of operations as a producer of road bikes: • Purchased $400,000 of materials. • Used $343,750 of direct materials in production. • Incurred $295,000 of direct labor wages. • Applied factory overhead at a rate of 75% of direct labor cost. • Transferred $815,000 of work in process to finished goods. • Sold goods with a cost of $789,000. • Sold goods for $1,400,000. • Incurred $316,000 of selling expenses. • Incurred $125,000 of administrative expenses. Required: A. Prepare the June income statement for Chi-Lite. Assume that Chi-Lite uses the perpetual inventory method. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. B. Determine the inventory balances at the end of the first month of operations.

Explanation / Answer

A) Income Statement for the month of June, 2016 Sales 1400000 Cost of goods sold 789000 Gross margin 611000 Less: Selling & administrative exps Selling expenses 316000 Administrative expenses 125000 441000 Net Income 170000 B) Inventory Balances: 1) Materials = 400000-343750 = $56250 (Opening balance - materials consumed; as perpetualy inventory system is used) 2) Work in Process = 343750+295000+75% of 295000-815000 = $45000 (Direct materials used+direct labor cost+FOH applied-cost finished goods tranferred out) 3) Finished goods = 815000 - 789000 = $26000 (cost of goods produced-cost of goods sold)

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