“I was sure that when our cellphone hit the market it would be an instant success,” said Brittany Patel, founder and president of Sun Power Communications, 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 whichPatelwas referring follow:
“At this rate we’ll be out of business within a year,” said Peter Merchant, the company’s accountant. “But I’ve double-checked these figures, so I know they’re right.”
Sun Power Communications was organized at the beginning of the current year to produce and market a revolutionary new solar-powered cellphone. 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 Merchant, her assistant.
“We may not last a year if the insurance company doesn’t pay the $286,000 it owes us for the 8,000 cellphones lost in the warehouse fire last week,” said Patel. “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 cellphones were destroyed. (These phones 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 phones destroyed or stolen. Merchant has determined this cost as follows:
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:
b. 80% of the rental cost for facilities and 90% of the utilities cost relates to manufacturing operations. The remaining amounts relate to selling and administrative activities.
Required:
1. Write a brief memorandum to the president identifying 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 Sun Power Communications, Inc. $286,000? Explain your answer in another brief memorandum to the president.
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