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nexus9112 [7]
3 years ago
14

Exercise 19-3 Income reporting under absorption costing and variable costing LO P2 Sims Company, a manufacturer of tablet comput

ers, began operations on January 1, 2017. Its cost and sales information for this year follows. Manufacturing costs Direct materials $ 40 per unit Direct labor $ 60 per unit Overhead costs for the year Variable overhead $ 2,200,000 Fixed overhead $ 8,800,000 Selling and administrative costs for the year Variable $ 700,000 Fixed $ 4,750,000 Production and sales for the year Units produced 110,000 units Units sold 80,000 units Sales price per unit $ 350 per unit 1. Prepare an income statement for the year using variable costing. 2. Prepare an income statement for the year using absorption costing. 3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?
Business
1 answer:
Juliette [100K]3 years ago
7 0

Answer:

Variable costing principle uses variable cost alone while absorption costing uses all cost both fixed and variable that are related to the production

1)Variable costing

Income = $28,000,000

Cost of production - $9,600,000

Gross profit = 18,400,000

Admin & selling expenses =509,091

PBIT = 17,890,909

2)Absorption costing

Income - $28,000,000

Cost of production  18,400,000

Gross profit        9,600,000

Admin $ selling expenses 5,259,091

PBIT = 4,340,909

3)Reported income is identical under both variable and absorption costing when production is the same with sales and there is no opening finished good inventory . All costs including the fixed costs are absorbed into the cost of production

Explanation:

Direct material - $40/unit

Direct labor $60/unit

Variable overhead cost - $2,200,000

Fixed overhead cost - $8,800,000

Variable admin cost - $700,000

Fixed admin cost - $4,750,000

Unit produced - 110,000

Unit sold - 80,000

Selling price - $350

sales revenue - 80000*$350 - $28,000,000

Cost

Direct material = 80000* 40= $3,200,000

Direct labor      = 80000*60 = $4,800,000

Variable overhead = 2200000/110000 * 80000 = $1,600,000

Fixed overhead = $8,800,000 =

Variable admin= 700000/110000 * 80000 = $509,091

Fixed admin = $ 4,750,000

Total cost = $23,659,091

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Answer:

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Journal Entries:

1.  July 1, Year 1:

Debit Cash $73,100,469

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To record the issuance of bonds at a premium.

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To record the second semi-annual interest payment, including amortization.

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4. Yes.  The bonds are issued at a premium.  So the bond proceeds will always be greater than the face amount, and the contract rate (coupon rate) will always be greater than the market (effective) rate.

5. The price of $73,100,469 received for the bonds by using the present value tables is $1,124.62 ($73,100,469/65,000) per $1,000.

Explanation:

a) Data and Calculations:

Face value of bonds issued = $65,000,000

Price received from the issue  $73,100,469

Premium received =                   $8,100,469

Period of maturity = 10 years

Coupon interest rate = 12%

Market (effective) interest rate = 10%

Payment of interest = semiannually on December 31 and June 30

Analysis of Journal Entries:

1.  July 1, Year 1:

Cash $73,100,469 Bonds Payable $65,000,000 Bonds Premium $8,100,469

2. a) December 31, Year 1:

Interest Expense $3,494,976.55 Amortization $405,023.45 Cash $3,900,000.00

b) June 30, Year 2:

Interest Expense $3,494,976.55 Amortization $405,023.45 Cash $3,900,000.00

N (# of periods)  20

I/Y (Interest per year)  10

PMT (Periodic Payment)  3900000

FV (Future Value)  65000000

Results

PV = $73,100,439

Sum of all periodic payments = $78,000,000.00

Total Interest $69,899,569

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