"I was sure that when our battery hit the market it would be an instant success," said Roger Strong, founder and president of Solar Technology, Inc. "But just look at the gusher of red ink for the first quarter. It's obvious that we're better scientists than we are businesspeople. At this rate we'll be out of business within a year." The data to which Roger was referring follow:
Solar Technology, Inc.
Income Statement
For the Quarter Ended March 31
Sales (32,000 batteries) ............................................................................ $ 960,000
Less operating expenses: ............................................
Selling and administrative expenses ............................ $290,000
Manufacturing overhead ............................................... 410,000
Purchases of raw materials ............................................ 360,000
Direct labor ..................................................................... 70,000.......... 1,130,000
Net operating loss .................................................................................. $ (170,000)
Solar Technology was organized at the beginning of the current year to produce and market a revolutionary new solar battery. The company's accounting system was set up by Roger's brother-in-law who had taken an accounting course about 10 years ago.
"We may not last a year if the insurance company doesn't pay the $226,000 it owes us for the 8,000 batteries lost in the warehouse fire last week," said Roger. "The insurance adjuster says our claim is inflated, but he's just trying to pressure us into a lower figure. We have the data to back up our claim, and it will stand up in any court."
On April 3, just after the end of the first quarter, the company's finished goods storage area was swept by fire and all 8,000 unsold batteries were destroyed. (These batteries were part of the 40,000 units completed during the first quarter.) The company's insurance policy states that the company will be reimbursed for the "cost" of any finished batteries destroyed or stolen. Roger's brother-in-law has determined this cost as follows:

8,000 batteries × $28.25 per unit = $226,000
Inventories at the beginning and end of the quarter were as follows:
.................................Beginning of the Quarter............. End of the Quarter
Raw materials .......................................................... $0............................ $10,000
Work in process ....................................................... $0............................ $50,000
Finished goods ......................................................... $0.................................... ?
Required:
1. What conceptual errors, if any, were made in preparing the income statement above?
2. Prepare a schedule of cost of goods manufactured for the first quarter.
3. Prepare a corrected income statement for the first quarter. Your statement should show in detail how the cost of goods sold is computed.
4. Do you agree that the insurance company owes Solar Technology, Inc., $226,000? Explain your answer.

Transcribed Image Text:

Total costs for the quarterS1.130,000 Batteries produced during the quarter 40,000 units - $28.25 per unit