Now that both the Absorption and Marginal Costing Income Statements have been completed the reconciliation between the Net Incomes calculated under each method can be done.
I hope that you found this proposed solution helpful! If you did please share it! Also, feel free to ask any questions or to comment below. Best of luck!
Telcom's Manufacturing Inc.
2b (i) Calculation of total cost of L23 and L24 using the traditional costing system:
Under the traditional costing system:
Depreciation on Equipment: 10% x $170,240 = $17,024 per year. This is the depreciation charge for the Statement of Comprehensive Income.
Accumulated depreciation charged on Equipment as at December 31st 2012 - [$32,200 + $17,024] = $49,224. This figure will be recorded on the Statement of Financial Position.
Insurance to be recorded on the Statement of Comprehensive Income = $1,320. Prepaid insurance to be recorded on the Statement of Financial Position = [$2,590 - $1,320] = $1,270.
The amount of $50,000 is now a ‘bad debt to be written off’ therefore:
Double entry: Debit Bad Debt Expense Account $50,000
Credit Accounts Receivables Account $50,000
The new provision for doubtful debt balance = 2% x [$300,050 - $50,000] = $5,001. Therefore the current provision needs to be increased by $519, [that is $5,001-$ $4,482]. This increase of $519 will be recorded as an expense on the Statement of Comprehensive Income. The new provision balance of $5,001 will be netted off against the accounts receivable figure in the Statement of Financial Position.
1. Calculation of income tax paid during 2007-2008.
Alternatively a ledger account can be prepared to calculate the amount of income tax that was paid during the year:
The bank loan will be recorded as follows:
$6,250 will be recorded under the Current Liabilities section of the Statement of Financial Position as this portion is due to be paid in less than 1 year.
The balance $25,000, ($31,250-$6,250) will be recorded under the Non Current Liabilities section of the Statement of Financial Position as this portion is not due to be paid in less than 1 year.
Dividends due on investments – 30¢ x $25,000 = $7,500. This would be added to the dividends from investments balance of $3,500 as this is dividends receivable. Therefore the total for the Statement of Comprehensive Income would be $11,000 i.e. ($3,500+$7,500) and the dividends receivable of $7,500 will appear in the Statement of Financial Position under Current Assets.
The amount of $80,000 is now a "bad debt to be written off" therefore:
Double entry: Debit Bad Debt Expense Account $80,000
Credit Accounts Receivables Account $80,000
The author holds a Bsc (Hons) Degree in Applied Accounting from Oxford Brookes University, England and enjoys a successful career as an Accounting Supervisor and a private tutor.