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Chapter 24: 4CA_5 (page 1454)

At December 31, 2017, Coburn Corp. has assets of \(10,000,000, liabilities of \)6,000,000, common stock of \(2,000,000 (representing 2,000,000 shares of \)1 par common stock), and retained earnings of \(2,000,000. Net sales for the year 2017 were \)18,000,000, and net income was \(800,000. As auditors of this company, you are making a review of subsequent events on February 13, 2018, and you find the following.

5) Merchandise traded in the open market is recorded in the company鈥檚 records at \)1.40 per unit on December 31, 2017. This price had prevailed for 2 weeks, after release of an official market report that predicted vastly enlarged supplies; however, no purchases were made at \(1.40. The price throughout the preceding year had been about \)2, which was the level experienced over several years. On January 18, 2018, the price returned to $2, after public disclosure of an error in the official calculations of the prior December, correction of which destroyed the expectations of excessive supplies. Inventory at December 31, 2017, was on a lower-of-LIFO-cost-or-market basis.

Instructions

State in each case how the 2017 financial statements would be affected, if at all.

Short Answer

Expert verified

The market value should be changed from $2.00 to $1.40.

Step by step solution

01

Meaning of LIFO

LIFO is an inventory valuation method in which the last item is sold first. LIFO is not adopted by every business enterprise because at the end of the year items become old and lose value over time.

02

Explaining the effect in the financial statements

Apply the low-cost-or-market principle to the inventory amount as of December 31, 2017, requiring a market value of $2.00 instead of $1.40. The actual estimate was a temporary error, and no purchases were made at that price.

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Most popular questions from this chapter

Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwich鈥攂ut, rats!, even recourse to the Freedom of Information Act didn鈥檛 help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole鈥攂ut no one was very eager to salute. Even after some of the more objectionable features鈥攃ompulsory corrections and detailed explanations of why the estimates went awry鈥攚ere peeled off the original proposal.

Seemingly, despite the Commission鈥檚 smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a 鈥淪afe Harbor鈥� rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).

Instructions

  1. What are the arguments for preparing profit forecasts?

Answer each of the questions in the following unrelated situations.

d) A company has current assets of \(600,000 and current liabilities of \)240,000. The board of directors declares a cash dividend of $180,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?

(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn鈥檚 cash flow problems are due primarily to the company鈥檚 desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years

BRADBURN CORPORATION

BALANCE SHEET

MARCH 31

Assets

2018

2017

Cash

\) 18,200

\( 12,500

Notes receivable

148,000

132,000

Accounts receivable (net)

131,800

125,500

Inventories (at cost)

105,000

50,000

Plant & Equipment (net of depreciation)

1,449,000

1,420,500

Total assets

\)1,852,000

\(1,740,500

Liabilities and Stockholders鈥� Equity

Accounts payable

\) 79,000

\( 91,000

Notes payable

76,000

61,500

Accrued liabilities

9,000

6,000

Common stock (130,000 shares, \)10 par)

1,300,000

1,300,000

Retained earnings*

388,000

282,000

Total liabilities and stockholders鈥� equity

\(1,852,000

\)1,740,500

*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.

BRADBURN CORPORATION

INCOME STATEMENT

FOR THE FISCAL YEARS ENDED MARCH 31

2018

2017

Sales revenue

\(3,000,000

\)2,700,000

Cost of goods sold*

1,530,000

1,425,000

Gross margin

1,470,000

1,275,000

Operating expenses

860,000

780,000

Income before income taxes

610,000

495,000

Income taxes (40%)

244,000

198,000

Net income

\( 366,000

\) 297,000

Depreciation charges on the plant and equipment of \(100,000 and \)102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

Instructions

(a).Compute the following items for Bradburn Corporation.

3. Inventory turnover for fiscal year 2018.

Explain the meaning of the following terms: (a) common size analysis, (b) vertical analysis, (c) horizontal analysis, and (d) percentage analysis.

Tina Bailey, a student of intermediate accounting, was heard to remark after a class discussion on segment reporting, 鈥淎ll this is very confusing to me. First we are told that there is merit in presenting the consolidated results, and now we are told that it is better to show segmental results. I wish they would make up their minds.鈥� Evaluate this comment.
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