Question

Below is Salem Company’s income statement for 2019 that was prepared by an inexperienced accountant.

Salem Company
Income Statement
As of December 31, 2019
Revenues:
Sales revenue ……………..…………………………………… $298,000
Wages payable…………..……………………………………….. 4,000
Gain on sale of investment…………………………………….. 5,250
Deferred revenue………………………………………………. 2,500
Interest payable………………………………………………… 1,000
Accumulated depreciation……………………………………… 8,000
Total revenues ………………………………………………….. $318,750
Less operating expenses:
Selling expenses….……………………… …………………. $32,250
Research and development expense………………….…….. 4,750
Prepaid advertising …….…………………………………. 3,000
Indirect manufacturing labor cost..………………………… 16,200
Utilities expense..…. .....................………………………… 10,200
Direct manufacturing labor cost. ………………………..… 41,000
Factory equipment, cost…………………………………….. 40,000
Insurance expense…………………….………………. …… 3,500
Restructuring costs………………………………………….. 4,000
Direct materials purchased………………………………..... 93,000
Interest expense……………………………………………. 1,750
Rent expense…..…………….………………. …………….. 18,000
Other factory indirect costs…………………………………. 3,000
Dividend paid………………………………………………. 1,500
Administrative expenses………………….…………………. 40,400
Short-term investment……………………………………… . 17,000
Total operating expenses …………………………………….. 329,550
Net operating loss …………………………………………….. ($10,800)
a. Seventy percent (70%) of utilities expense and 80% of insurance expense are for factory operations.
Add the remaining utilities and insurance expenses equally to selling expenses and administrative expenses.
b. Sixty percent (60%) of the rent expense is associated with factory operations. Add the remaining rent expense equally to
selling expenses and administrative expenses.
c. Factory equipment was purchased January 1, 2018. It was estimated that the useful life of the equipment is
10 years and the residual value, $4,000. The $8,000 accumulated depreciation above is for 2018. No depreciation
was charged for 2019. The company uses the double-declining balance method of depreciation.
d. Inventory balances are:
January 1, 2019 December 31, 2019
Direct materials……………… $5,000 $6,600
Work-in-process …………….. $8,000 $10,000
Finished goods ……………… $25,000 $28,000
The president is disappointed with the results of operations and has asked you to review the income statement and make a recommendation as to whether the company should look for a buyer for its assets.
Required:
1. As one step in gathering data for the president, prepare a corrected schedule of cost of goods manufactured for the year ended December 31, 2019
2. As a second step, prepare a corrected multiple-step income statement for the year ended December 31, 2019.

Answer 1

To address the errors in Salem Company's income statement, adjustments need to be made to properly allocate certain expenses to factory operations and re-calculate depreciation. A corrected schedule of cost of goods manufactured and a corrected multiple-step income statement must reflect these changes to provide accurate financial results for the company.

Step-by-step explanation:

Corrected Schedule of Cost of Goods Manufactured

To prepare a corrected schedule of cost of goods manufactured, we begin by calculating the factory overhead:

Adding these amounts gives us the total factory overhead.

Next, we proceed to calculate the cost of direct materials:

Total Cost of Direct Materials Used = Begin Inventory + Purchased - Ending = $91,400.

Now, for the Cost of Goods Manufactured, we add Direct Materials Used ($91,400), Direct Manufacturing Labor Cost ($41,000), and Factory Overhead (which includes adjusted Utilities, Insurance, Rent, and Depreciation).

Corrected Multiple-Step Income Statement

For the corrected multiple-step income statement, we must adjust revenues and expenses, particularly removing items that are not part of the operating revenues, such as Wages Payable, and Gain on Sale of Investment. Then we should correct the operating expenses by allocating some expenses to the correct categories as per the given instructions and add the depreciation expense for the factory equipment using the Double-Declining Balance Method.

Adjusted operating expenses will include the specific allocation of utilities and insurance expenses to the selling and administrative expenses.

The Net Operating Loss should be recalculated after these adjustments.

1