Post-Balance-Sheet Events

At December 31, 2014, 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 of 2014 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, 2015, and you find the following:

On February 3, 2015, one of Coburn’s customers declared bankruptcy. At December 31, 2014, this company owed Coburn $300,000, of which $60,000 was paid in January 2015.

On January 8, 2015, one of the three major plants of the client burned.

On January 23, 2015, a strike was called at one of Coburn’s largest plants, which halted 30% of its production. As of today (February 13), the strike has not been settled.

A major electronics enterprise has introduced a line of products that would compete directly ith Coburn’s primary line, now being produced in a specialty designed plant. Because of manufacturing innovations, the competitor has been able to achieve quality similar to that of Coburn’s products but at a 50% lower. Coburn 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, 2014. 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, 2015, 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, 2015, was on a lower-cost-or-market basis.

On February 1, 2015, 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