Accounting theory and practice, Volume 2 (of 3)

by Roy B. Kester

Problem

Using the information of Problem XXIII and the statements drawn up there, prepare adjusting and closing journal entries covering just the manufacturing activities of the business.

Instructions

It is desired here to give the student practice with the group of entries with which he is not yet familiar. The adjusting and closing entries covering the other activities of the business follow the methods already explained. In summarizing the manufacturing group of entries, the process is the same, in the main, as other summary entries. The exact entries necessary depend, of course, on the accounts carried and the way in which they are used. This applies particularly to the use of one or several different inventory accounts and the Goods in Process account.

To bring the goods in process inventory on the books requires a debit to Manufacturing and a credit to Goods in Process to clear it—i.e., Goods in Process—of the initial inventory, and then a debit to Goods in Process and a credit to Manufacturing to set up the present inventory. This secures the proper charge or credit, for the excess of the one inventory over the other, necessary to develop the correct cost to manufacture.

Where a Finished Goods account is carried, it is sometimes used as an inventory account, in which case the method of handling it is similar to that of Goods in Process excepting that the Finished Goods account is used in connection with the Profit and Loss (or Trading) account instead of the Manufacturing account. When Finished Goods account is used in this way, the balance of the Manufacturing account, i.e., the cost of goods manufactured, is transferred in toto to the Profit and Loss account in which the cost of the manufactured goods sold is developed. Where other commodities are dealt in, in addition to the manufactured product, this may result in an awkward and inconsistent method of developing the costs of the different commodities sold. This has sometimes led to the use of the Finished Goods account somewhat on the lines of a purchases account. To it the balance of the Manufacturing account is transferred, and the cost of finished goods sold is developed in it by bringing the two inventories into this account. This necessitates the use of a Finished Goods Inventory account in addition to Finished Goods account—or finished goods inventory may be set up in Merchandise Inventory account, where only one inventory account is carried. The cost of manufactured goods sold is then transferred from Finished Goods account to Profit and Loss account, where, together with the costs of the other commodities sold, it helps to effect the closing of the books.

In this problem use the Finished Beds account as an inventory account.

XXV-XXVI

Practice Data

Prepare a condensed balance sheet and profit and loss statement as of December 31, 1917, taking account of the following adjustments and inventories. Also draw up a statement of surplus for the 16 months of the current fiscal period.