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 bottom line on our Income Statement! Way too much red ink! Its obvious we are better scientists than we are businesspeople. At this rate, well be out of business within a year. The data to which Roger was referring follows: 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 battery. The companys accounting system was set up by Rogers brother-in- law who had taken and accounting course about 10 years ago. We may not last a year if the insurance company doesnt 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 hes 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 companys 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 companys insurance policy states that the company will be reimbursed for the cost of any finished batteries destroyed or stolen. Rogers brother-in-law has determined this cost as follows: Total costs for the quarter = $1,130,000 Batteries produced during the quarter 40,000 units = $28.25 per unit 8,000 batteries x $28.85 per unit = $226,000 Inventories at the beginning and end of the quarter were as follows: Beginning of Quarter End of Quarter Raw Materials $0 $10,000 Work in Process $0 $50,000 Finished Goods $0 $? CHAPTER 2 Case Study

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.