Question

The following events took place for Rushmore Biking Inc. during February, the first month of operations as a producer of road bikes:Purchased $480,000 of materials.Used $434,500 of direct materials in production.Incurred $125,000 of direct labor wages.Applied factory overhead at a rate of 40% of direct labor cost.Transferred $578,000 of work in process to finished goods.Sold goods with a cost of $550,000.Revenues earned by selling bikes, $910,000.Incurred $185,000 of selling expenses.Incurred $90,000 of administrative expenses.Required:a. Prepare the income statement for Rushmore Biking Inc. for the month ending February 28. Assume that Rushmore Biking Inc. uses the perpetual inventory method.b. Determine the inventory balances on February 28, the end of the first month of operations.

Answer 1

Answer: Please find answers in the explanation column

Explanation:

Using  the perpetual inventory method.

                       Rushmore Biking Inc

Income Statement    For the Month Ended February 28

Revenue                                            $910,000

Cost of goods sold                            -$550,000

Gross profit                                       $360,000

Selling and administrative expense:  

Selling expense                                            $185,000  

Administrative expense                              $90,000  

Total Selling and administrative expense    $275,000

Operating income                                      

(Gross profit -Total Selling and administrative expense)

                                                                              $85,000

b) Inventory balance  on Current assets for February 28  

Direct Materials inventory

Purchases of materials- direct materials used in production

= $480,000- $434, 500= $45500

Work in process inventory

direct materials used in production+Direct labor wages incurred+Factory overhead applied-Transferred to finished goods

= $434500+125000+ ($125000*40%)  - 578000

= $434500+125000+$50,000 - $578000

=$31,500

Finished goods inventory

Transferred to finished goods-Cost of goods sold

= $578,000-550,000= $28000

Answer 2

The preparation of the income statement and the balance of the inventory should be shown below.

a. Preparation of income statement:

                   Rushmore Biking Inc

Income Statement    For the Month Ended February 28

Revenue                                            $910,000

Less:Cost of goods sold                            -$550,000

Gross profit                                       $360,000

Selling and administrative expense:  

Less: Selling expense                                            $185,000  

Less: Administrative expense                              $90,000  

Total Selling and administrative expense    $275,000

Operating income                                          $85,000

Working note:

= Gross profit -Total Selling and administrative expense

= Operating income

                                                                         

b) The inventory balances on February 28:

Direct Materials inventory:

= Purchases of materials- direct materials used in production

= $480,000- $434, 500= $45500

Work in process inventory

= direct materials used in production+Direct labor wages incurred+Factory overhead applied-Transferred to finished goods

= $434500+125000+ ($125000*40%)  - 578000

= $434500+125000+$50,000 - $578000

=$31,500

Finished goods inventory:

=Transferred to finished goods-Cost of goods sold

= $578,000-550,000= $28000

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