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Solar Technology, Inc.

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"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." The data to which Roger was referring follow:

Solar Technology, Inc.
Income Statement
For the Quarter Ended March 31, 2002

Sales (32,000 batteries) $960,000
Less operating expenses:
Selling & administrative salaries $110,000
Advertising 90,000
Maintenance, production 43,000
Indirect labor cost 120,000
Cleaning supplies, production 7,000
Purchases of raw materials 360,000
Rental cost, facilities 75,000
Insurance, production 8,000
Depreciation, office equipment 27,000
Utilities 80,000
Depreciation, production equip. 100,000
Direct labor cost 70,000
Travel, salespersons 40,000
--------
Total operating expenses 1,130,000
------------
Net loss $(170,000)
========

"At this rate, we'll be out of business within a year," said Cindy Zhang, the company's accountant. "But I've double-checked these figures, so I know they're right."

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 Margie Wallace, an experienced 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 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. Zhang has determined this cost as follows:

Total cost for the quarter, $1,130,000
-------------------------------------------------- = $28.25 per unit
Batteries produced during the quarter, 40,000

8,000 batteries x $28.25 =$226,000

The following additional information is available on the company's activities during the quarter ended March 31:

a. Inventories at the beginning and end of the quarter were as follows:

Beginning of End of
The quarter the quarter
-----------------------------------------------------------------------
Raw materials 0 $10,000
Work in process 0 50,000
Finished goods 0 ?

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 activities.

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.

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"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." The data to which Roger was referring follow:

Solar Technology, Inc.
Income Statement
For the Quarter Ended March 31, 2002

Sales (32,000 batteries) $960,000
Less operating expenses:
Selling & administrative salaries $110,000
Advertising 90,000
Maintenance, production 43,000
Indirect labor cost 120,000
Cleaning supplies, production 7,000
Purchases of raw materials 360,000
Rental cost, facilities 75,000
Insurance, production 8,000
Depreciation, office equipment 27,000
Utilities 80,000
Depreciation, production equip. 100,000
Direct labor cost 70,000
Travel, salespersons 40,000
--------
Total operating expenses 1,130,000
------------
Net loss $(170,000)
========

"At this rate, we'll be out of business within a year," said Cindy Zhang, the company's accountant. "But I've double-checked these figures, so I know they're right."

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 Margie Wallace, an experienced 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 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 ...

Solution Summary

The solution explains the conceptual errors made in the income statement and prepares a corrected income statement.

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