ACT 220 question

Question

The Devon Motor Company produces automobiles. On April 1, the company had no beginning inventories, and it purchased 5,520 batteries at a cost of $55 per battery. It withdrew 5,100 batteries from the storeroom during the month. Of these, 100 were used to replace batteries in cars being used by the company’s traveling sales staff. The remaining 5,000 batteries withdrawn from the storeroom were placed in cars being produced by the company. Of the cars in production during April, 90 percent were completed and transferred from work in process to finished goods. Of the cars completed during the month, 30 percent were unsold at April 30.

 

Required:

1. and 2. Determine the cost of batteries that would appear in each of the following accounts on April 30 and select whether each of the accounts would appear on the balance sheet or on the income statement.

Raw materials:

Work in Progress:

Finished Goods:

Cost of Goods Sold:

Selling Expense:

Answer 1

1. Raw Materials - 5520 Batteries (B) purchased @ $55 apiece - $55/B · 5520B = $303,600 - This would be on the balance sheet since these batteries weren't sold in vehicles.
2. Work in Progress - 5000 Batteries (B) purchased @ $55 apiece - $55/B · 5000B = $275,000 - These vehicles aren't yet sold, so this cost would show on the balance sheet.
3. Finished Goods - 90% of 5000 Batteries (B) @ $55 apiece - $55/B · (5000B · 0.9) = $247,500 - These vehicles aren't yet sold, so this cost would show on the balance sheet.
4. Cost of Goods Sold - 30% of the vehicles weren't sold, so 70% of the produced (4500) vehicles were sold at $55 apiece for batteries. $55/B · (4500B · 0.7) = $173,250 - These vehicles were sold, so this cost would show on the income statement.
5. Selling Expense - This expense will include the cost to replace batteries in the cars being used by the sales staff. This value will be based on the amount of vehicles actually sold; we can get the required amount of batteries for the sales staff from ratios. For every 5000 batteries used in sold vehicles, 100 batteries are needed for sales staff. 100/5000 = 2%. 3150 Batteries are used in sold cars, so 2% of this value would be - 3150B · 0.02 = 63 Batteries @ $55 apiece. $55B · 63B = $3,465 sales expense. This would appear on the income sheet, since these vehicles are sold.