CA24-4 (Post-Balance Sheet Events) At December 31, 2007, Angie Brandt 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 2007 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, 2008, and you find the following.
1. On February 3, 2008, one of Brandt’s customers declared bankruptcy. At December 31, 2007, this company owed Brandt $300,000, of which $40,000 was paid in January, 2008.
2. On January 18, 2008, one of the three major plants of the client burned.
3. On January 23, 2008, a strike was called at one of Brandt’s largest plants, which halted 30% of its production. As of today (February 13) the strike has not been settled.
4. A major electronics enterprise has introduced a line of products that would compete directly with Brandt’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor has been able to achieve quality similar to that of Brandt’s products, but at a price 50% lower. Brandt officials say they will meet the lower prices, which are high enough to cover variable manufacturing and selling costs but which permit recovery of only a portion of fixed costs.
5. Merchandise traded in the open market is recorded in the company’s records at $1.40 per unit on December 31, 2007. 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, 2008, 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, 2007, was on a lower of cost or market basis.
6. On February 1, 2008, the board of directors adopted a resolution accepting the offer of an investment banker to guarantee the marketing of $1,200,000 of preferred stock.
Instructions
State in each case how the 2007 financial statements would be affected, if at all.
Click here for the solution: At December 31, 2007, Angie Brandt Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000
