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Impact of selling inventory on the accounting equation

Exercise 18-4A Job-order costing in a manufacturing company

Seahawk Inc. builds sailboats. On January 1, 2004, the company had the following account balances: $40,000 for both cash and common stock. Boat 25 was started on February 10 and finished on May 31. To build the boat, Seahawk had incurred cash costs of $5,100 for labor and $4,350 for materials.
During the same period, Seahawk paid $6,600 cash for actual manufacturing overhead costs. The company expects to incur $175,500 of indirect overhead cost during 2004. The overhead is allocated to jobs based on direct labor cost. The expected total labor cost for the year is $135,000.
Seahawk uses a just-in-time inventory management system. Consequently, it does not have raw materials inventory. Raw materials purchases are recorded directly in the Work in Process Inventory account.
a. Use the horizontal financial statements model, as illustrated here, to record Seahawk's manufacturing events. In the Cash Flow column, designate the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first row shows beginning balances.

Assets = Equity
Cash + WIP+ FG+ MO = Com. Stock + Ret. Earn Rev- Exp=NI Cash flow
40,000+ NA + NA+ NA = 40,000 +NA NA- NA =NA NA

b. If Seahawk desires to earn a profit equal to 20 percent of cost, for what price should it sell the boat?
c. If the boat is not sold by year end, what amount would appear in Work in Process Inventory and Finished Goods Inventory on the balance sheet for Boat 25?
d. Is the amount of inventory you calculated in Requirement c the actual or the estimated cost of the boat?
e. When is it appropriate to use estimated inventory cost on a year-end balance sheet?

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The solution explains the impact of selling inventory on the accounting equation