Question

Your best friend, Chris, is the owner of Salazar Company, a manufacturer of tablets. Recently, Salazar’s controller had to step down as she contracted Covid-19 and is now hospitalized. Jenny, the receptionist who attends MJC and is majoring in Accounting, prepared the income statement. Chris is concerned about the accuracy of the statement as the reported numbers are not consistent with prior periods’. Chris asks you to make the necessary corrections. Chris provides you with the income statement, the inventory levels at the beginning and end of the month, and allocation rates for the utilities expense and the insurance expense.

Salazar Company Income Statement For the Month Ended August 31, 202X $ 675,000 Sales Revenue Operating Expenses Raw materials purchases $ Direct labor costs Advertising expense Selling and administrative salaries Rent on factory facilities Depreciation on sales equipment Depreciation on factory equipment Indirect labor cost Utilities expense Insurance expense Total operating expenses Net Loss 220,000 160,000 75,000 70,000 60,000 50,000 35,000 20,000 10,000 5,000 705,000 (30,000) $ Raw materials Work in process Finished goods August 1 August 31 $ 19,500 $ 35,000 $ 25,000 $ 21,000 $ 40,000 $ 52,000 Utilities Expense Insurance Expense Factory 60% 70% Other 40.00% 30.00%

Requirements:

1. Prepare a cost of goods manufactured for August 202X.

2. Prepare a correct income statement for August 202X.

3. Write a memo explaining the managerial accounting principles Jenny violated. In your memo, quantify the magnitude of the error. Describe what impact Jenny’s errors had on the accounting equation.

Answer 1

$ $ 204,500 160,000 Requirement 1 | Cost of Goods Manufactured Salazar Company Schedule of Cost of Goods Manufactured Particulars $ Direct Materials : Raw Materials, Beginning $ 19,500 Add : Purchases of Raw Materials $ 220,000 Total Raw Materials Available $ 239,500 Less : Raw Materials, Ending $ (35,000) Raw Materials used in Production $ Direct Labor $ Add : Manufacturing Overheads - Rent on Factory Facilities $ 60,000 - Depreciation on Factory Equipment $ 35,000 - Indirect Labor Cost $ 20,000 - Utility Expenses (Factory) 6,000 - Insurance Expenses (Factory) 3,500 $ Total Manufacturing Costs $ Add : Work in Process, Beginning $ $ Less : Work in Process, Ending $ Cost of Goods Manufactured $ 124,500 489,000 25,000 514,000 (21,000 493,000 Working Note | Cost of Goods Sold Salazar Company Schedule of Cost of Goods Sold Particulars Finished Goods, Beginning $ Add : Cost of Goods Manufactured $ Cost of Goods available for Sale $ Less : Finished Goods, Ending $ Cost of Goods Sold $ $ 40,000 493,000 533,000 (52,000) 481,000

Requirement 2 | Income Statement Salazar Company Income Statement Particulars Sales Less : Cost of Goods Sold Gross Margin $ $ $ $ $ 675,000 481,000 194,000 Less : Selling and Administrative Expenses - Advertising Expenses - Selling and Administrative Salaries - Depreciation on Sales Equipment - Utility Expenses (Other) - Insurance Expenses (Other) Total Selling and Administrative Expenses 0 0 0 0 0 $ $ $ $ $ 75,000 70,000 50,000 4,000 1,500 $ 200,500 Net Operating Income / (Loss) $ (6,500)