Question

The law firm of Prawitt and Bradford uses a job order costing system to accumulate costs associated with individual cases. The following transactions occurred during August:

1. On August 3, 530 hours of professional (lawyer) time were charged to the Shadow Creek Co. breach of contract suit to prepare for the trial, at a rate of $150 per hour.
2. On August 10, travel costs of $15,700 were reimbursed to employees for depositions related to the Shadow Creek case.
3. On August 14, 270 hours of professional time were charged for the Obsidian trial at a rate of $300 per hour.
4. On August 18, an invoice of $49,700 was received from consultants Wadsley and Harden for expert testimony related to the Obsidian trial.
5. On August 27, office overhead was applied at a rate of $75 per professional hour charged to the Obsidian case.
6. On August 31, administrative and support salaries of $42,600 were paid for the month.
7. On August 31, office supplies for the month were used, totaling $14,400.
8. On August 31, professional salaries of $173,500 were paid for the month.
9. On August 31, Obsidian was billed $361,900 for the successful defense of the case.

a. Provide the journal entries for each of these transactions.
b. How much office overhead is over- or underapplied?
c. Determine the gross profit on the Obsidian case, assuming that over- or underapplied office overhead is closed monthly to cost of services.

Answer 1

a. Journal Entries:

Aug 3: Professional Fees Expense $79,500, Professional Fees Payable $79,500.

Aug 10: Travel Costs Expense $15,700, Cash $15,700.

Aug 14: Professional Fees Expense $81,000, Professional Fees Payable $81,000.

Aug 18: Expert Testimony Expense $49,700, Accounts Payable $49,700.

Aug 27: Professional Fees Expense $20,250, Office Overhead Applied $20,250.

Aug 31: Admin and Support Salaries Expense $42,600, Cash $42,600.

Aug 31: Office Supplies Expense $14,400, Accounts Payable $14,400.

Aug 31: Professional Salaries Expense $173,500, Cash $173,500.

Aug 31: Accounts Receivable $361,900, Professional Fees Revenue $361,900.

b. Office Overhead: No over- or underapplied ($0).

c. Gross Profit on Obsidian Case: $210,950.

Step-by-step explanation:

In August, the law firm incurred various costs related to cases. Journal entries record these transactions, ensuring accurate accounting. Office overhead is overapplied by $36,750, calculated as the difference between applied and actual overhead costs. The gross profit on the Obsidian case is $194,450, considering service revenue, professional fees, expert testimony, and adjusting for overapplied office overhead. This information aids the firm in financial analysis and decision-making.

a. The journal entries record the August transactions. Professional fees are debited for hours worked at the respective rates, travel costs are reimbursed, expert testimony expense is recognized, office overhead is applied, and various salaries and expenses are recorded. Billing to Obsidian is also recognized.

b. To calculate over- or underapplied office overhead, the applied overhead ($75 per professional hour * 270 hours) is compared to the actual overhead applied ($20,250). In this case, there is no over- or underapplied overhead, as both amounts are equal.

c. The gross profit on the Obsidian case is determined by subtracting the total professional fees and expert testimony expense from the professional fees revenue. The result is a gross profit of $210,950 for the successful defense of the Obsidian case.