I know Im a pretty good scientist, but I guess I still have some things to learn

€œI know I€™m a pretty good scientist, but I guess I still have some things to learn about running a business,€ said Staci Morales, founder and president of Medical Technology, Inc. €œDemand has been so strong for our heart monitor that I was sure we€™d be profitable immediately, but just look at the gusher of red ink for the first quarter. At this rate we€™ll be out of business in a year.€ The data to which Staci was referring are shown below:

Medical Technology was organized 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 Staci€™s brother-in-law who had taken an accounting course about 10 years ago. €œWe 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 truck accident last week,€ said Staci. €œThe agent says our claim is inflated, but that€™s a lot of baloney.€ Just after the end of the quarter, a truck 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. Staci€™s brother-in-law has determined this cost as follows:

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:

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, Inc., $227,000? Explain youranswer.

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Medical Technology, Inc. Income Statement For the Quarter Ended June 30 Sales (16,000 monitors)... Less operating expenses: $975,000 Selling and administrative salaries . . . . . . . $ 90,000 200,000 ..6,000 135,000 Depreciation, office equipment18,000 Advertising Cleaning supplies, factory Indirect labor costA Direct labor cost. Raw materials purchased.... Maintenance, factory. 80,00 .***310,000 47,000 ...65,000 9,000 .40,000 75,000 60,000 Insurance, factory. Utilities .. 1,135,000 Net operating loss.... S (160,000) Total costs for the quarter Monitors produced during the quarter $1,135,000/20,000 units $56.75 per unit 4,000 units × $56.75 per unit $227,000 Beginning of the Quarter End of the Quarter Raw materials Work in process. Finished goods.... $0 $0 $0 $40,000 $30,000