Assignment

"I know I'm a pretty good scientist, but I guess I still have some things to learn about running a business," said Jacob Rogers, founder and president of Medical Technology, Ltd. "Demand has been so strong for our heart monitor that I was sure we'd be profitable immediately, but just look all the red ink for the first quarter. At this rate we'll be out of business in a year." The data to which Jacob was referring are shown below: Medical Technology was organised on April 1 of the current year to produce and market a revolutionary new heart monitor. The company's accounting system was set up by Jacob's brother-in-law who had taken an accounting course about 10 years ago.

"We may not last a year if the insurance company doesn't pay the $227,000 it owes us for the 4,000 monitors lost in the lorry accident last week," said Staci. "The agent says our claim is inflated, but that's a lot of rubbish."

Just after the end of the quarter, a lorry carrying 4,000 monitors wrecked and burned, destroying the entire load. The monitors were part of the 20,000 units completed during the quarter ended June 30. They were in a warehouse awaiting sale at quarter-end and were sold and shipped on July 3 (this sale is not included on the income statement above). The trucking company's insurer is liable for the cost of the goods lost. Jacobs's brother-in-law has determined this cost as follows:

Total costs for the quarter = $1,135,000 / 20,000 units = $56.75 per unit Monitors produced during the quarter 4,000 units x $56.75 per unit = $227,000.

The following additional information is available on the company's activities during the quarter ended June 30:

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

Inventory Beg. of the Quarter End of the Quarter Raw materials $0 $40,000 Work in process $0 $30,000 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 quarter.

3. Prepare a corrected income statement for the quarter. Your statement should show in detail how the cost of goods sold is computed.

4. Do you agree that the insurance company owes Medical Technology Ltd. $227,000? Explain your answer.

5. Can you give any suggestions to Jacob in improving his accounting information system?

This is an open question, and any ideas are welcome, as long as appropriate.