CA24-4 (Post-Balance Sheet Events) At December 31, 2007, Angie Brandt
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.
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.
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.
State in each case how the 2007 financial statements would be affected, if at all.