ETech Company was organized onJanuary 1, 2017 to produce and sell a revolutionary smart watch. Atthe beginning of its second year (2018) finished goods inventorywas 2,000 watches. During 2018 ETech accountant resigned and theaccounting was done by an accounting student who worked part-timefor the company. The income statement below was prepared by theaccounting student.
ETech Company
Income Statement
As of December 31, 2018
Revenues:
Sales revenue (38,000watches)………………………………. $1,140,000
Royaltyrevenue………………………………………………. 500
Gain on sale of tradinginvestment…………………………… 7,000
Deferred rent revenue…………..…………………………… 3,500
Interestpayable………………………………………………... 3,700
Total revenues ………………………………………………….. $1,154,700
Operating expenses:
Cost of goods manufactured. ..……………………………… $1,113,000
Selling and distribution expense………………………..…… 195,000
General and administrativeexpense………………………… 95,000
Restructuringcosts…………………………………………. 25,000
Short-terminvestments……………………………………… 17,000
Interest expense………………. …………………………….. 5,000
Dividendpaid……………………………………………….. 1,000
Total operating expenses……………………………………… 1,451,000
Net loss ………………………………………………………… ($296,300)
ETech Company
Schedule of Cost of Goods Manufactured
As of December 31, 2018
Purchase of directmaterials……………………………………. 360,000
Direct manufacturing labor costs……………………………… 79,000
Indirect Manufacturing Overhead:
Factorymaintenance.…..…….……………………………… $35,000
Factory insurance ….……………………………………….. 3,000
Indirect manufacturing laborcosts.………………………….. 105,000
Rent expense………………………………………………… 84,000
Utilities expense……………………………………………… 30,000
Research & developmentexpense…………………………... 15,000
Prepaid factoryinsurance……………………………………. 2,000
Factory equipment…………………………………………... 500,000
Accumulated depreciation -factory equipment ………………. (100,000)
Total indirect manufacturingoverhead………………………… 674,000
Cost of goods manufactured………………………………….. $1,113,000
Additional information about the company’s activities during theyear is as follows:
a. In 2018 the companyproduced 40,000 watches.
b. Inventories at thebeginning and end of the year were as follows:
January1,2018 December 31, 2018
Direct materials……………… $8,000 $10,000
Work in process …………….. $25,200 49,000
Finished goods ……………… $37,800 ?
c. Seventy five percent (75%) of rent expenserelates to manufacturing, 15% to general and administrative expenseand 10% to selling and distribution expense.
Also, 90% of utilities expense relates to manufacturing, 6% togeneral and administrative expense and 4% to selling anddistribution expense.
d. Factory equipment was purchased January 2,2017 and is estimated to have a useful life of 10 years with a$5,000 salvage value remaining at the end of its useful life. Thecompany uses the double-declining-balance method of depreciation.The accumulated depreciation of $100,000 reported in the Scheduleof Cost of Goods Manufactured resulted from 2017 factory equipmentdepreciation. No depreciation was charged for 2018.
e. The company’s tax rate is 21 %.
The company’s CEO is concerned about the large net loss andhires your accounting firm to review the above financialstatements.
Required:
- Prepare a corrected Schedule of Cost of Goods Manufactured forthe year ended December 31, 2018.
- Calculate the cost of producing one watch (showcalculation)
- Prepare a revised multiple-step income statement for the yearended December 31, 2018.
