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. Its obvious that were better scientists that we are businesspeople. The data to which Roger was referring follow:
At this rate well be out of business within a year said Cindy Zhang, the companys accountant. But Ive double-checked these figures, so I know theyre right. Solar Technology was organized at the beginning of the current year to produce and market a revolutionary new solar battery. The companys accounting system was set up be Margie Wallace, an experience accountant who recently left the company to do independent consulting work. The statement above was prepared by Zhang, her assistant.
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 out 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. Zhang has determined this cost as follows:
Total costs for the quarter/ Batteries produced during the quarter = $1,130,000/ 40,000units
= $28.25 per unit
8,000 batteries x $ 28.25 per unit = $225,000
The following additional information is available on the companys activities during the quarter ended Marc 31:
a. Inventories at the beginning and end of the quarter were as follows:
b. Eighty percent of the rental cost for facilities and 90% of the utilities cost relate to manufacturing operations. The remaining amounts relate to selling and administrative activates.
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 shoe 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.