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1E

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Intermediate Accounting (Kieso)
Found in: Page 1447

Short Answer

Madrasah Corporation issued its financial statements for the year ended December 31, 2017, on March 10, 2018. The following events took place early in 2018.

  1. On January 10, 10,000 shares of $5 par value common stock were issued at $66 per share.
  2. On March 1, Madrasah determined after negotiations with the Internal Revenue Service that income taxes payable for 2017 should be $1,270,000. On December 31, 2017, income taxes payable were recorded at $1,100,000.

Instructions

Discuss how the preceding post-balance-sheet events should be reflected in the 2017 financial statements.

Madrasah Corporation should diminish earnings by $170,000 in the balance sheet.

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Step by Step Solution

Meaning of Financial Statements

Financial statements are records that express the business practice and monetary performance of a company. Financial statements are frequently checked by government offices, accountants, firms, etc. to guarantee accuracy and for valuation, financing, or contribution purposes.

Discussing the preceding post-balance-sheet events that should be reflected in the 2017 financial statements

a) Issuance of common stock is an example of the latter event that virtually confirms circumstances that were not present at the balance sheet date but arose after that date. After that, no amendments are made to the financial statements. In any event, this capability should be disclosed in a letter, a supplemental plan, or a fully enabled financial data platform.

b) An altered assessment of income tax payable is an example of a later event that appears to be excessive with respect to the conditions as at the balance sheet date. On December 31, 2017, the income assessment liability existed, although the amount had not been established. This event has an impact on past values and should result in adjustments to the financial statements.

The proper sum ($1,270,000) would have been recorded on December 31 in the event that it had been accessible. Hence, Madrasah should increase pay charge cost within the 2017 income statement by $170,000 ($1,270,000 – $1,100,000). Within the balance sheet, income taxes payable ought to be expanded and held earnings diminished by $170,000.

Most popular questions for Business-studies Textbooks

(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’s cash flow problems are due primarily to the company’s 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’ 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’ 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.

4) Return on assets for fiscal years 2017 and 2018. (Assume total assets

were $1,688,500 at 3/31/16.)

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