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Delta Mountain Supplies has been in business for three months. The company was formed by two outdoor enthusiasts to produce high quality sleeping bags, which

Delta Mountain Supplies has been in business for three months. The company was formed by two outdoor enthusiasts to produce high quality sleeping bags, which can used in all kinds of weather conditions. The owners of the company were well skilled in production and had developed an excellent relationship with a boutique store that specializes in selling outdoor equipment. The administration work and the accounting have been managed by the brother of one of the owner’s. The brother had a business degree but no special training in accounting.

The owners had just received the income statement for the latest quarter and were somewhat dismayed by the results. The company had almost reached its productive capacity for producing sleeping bags and most of them had been sold. Still, the income statement, presented in exhibit one, showed an operating loss for the quarter.

Believing something was not correct, the owners have hired you to review the accounting information and to report back to them.

Exhibit One

Delta Mountain Supplies

Income Statement

For the Quarter ended, September 30th Sales (5,000 sleeping bags)

$720,000

Operating expenses:

Selling and administrative salaries

$63,000

Travel for sales purposes

45,000

Advertising

98,000

Indirect labor costs

100,000

Raw materials purchased

220,000

Plant supplies

5,000

Direct labor cost

75,000

Plant maintenance

38,000

Depreciation, office equipment

13,000

Rent (90% for the plant, 10% for sales space)

50,000

Insurance (Plant only)

6,000

Depreciation, Plant equipment

65,000

Utilities (80% plant, 20% for sales operations)

32,000

Total operating expenses

810,000

Operating loss

$(90,000)

During the quarter, the company completed 7,000 sleeping bags. The owners completed a physical inventory count and valuation on September 30th. The opening and closing inventory values are as follows:

July 1st

Raw materials inventory

$0

$30,000

Work-in-process inventory

$0

$24,000

Finished goods inventory

$0

?


1. Describe two conceptual errors that the “accountant” made in preparing the income statement shown in exhibit one

2. Prepare a schedule of the cost of goods manufactured for the quarter ending September 30th.

3. Prepare a corrected income statement for the quarter.

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