E24-2 (Post-Balance-Sheet Events) For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose. ______ 1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end. ______ 2. Introduction of a new product line. ______ 3. Loss of assembly plant due to fire. ______ 4. Sale of a significant portion of the company s assets. ______ 5. Retirement of the company president. ______ 6. Prolonged employee strike. ______ 7. Loss of a significant customer. ______ 8. Issuance of a significant number of shares of common stock. ______ 9. Material loss on a year-end receivable because of a customer s bankruptcy. ______ 10. Hiring of a new president. ______ 11. Settlement of prior year s litigation against the company. ______ 12. Merger with another company of comparable size.
E24-4 (Ratio Computation and Analysis; Liquidity) As loan analyst for Utrillo Bank, you have been presented the following information. Toulouse Co. Lautrec Co. Assets Cash $ 120,000 $320,000 Receivables 220,000 302,000 Inventories 570,000 518,000 Total current assets 910,000 1,140,000 Other assets 500,000 612,000 Total assets $1,410,000 $1,752,000 Liabilities and Stockholders Equity Current liabilities $ 305,000 $ 350,000 Long-term liabilities 400,000 500,000 Capital stock and retained earnings 705,000 902,000 Total liabilities and stockholders equity $1,410,000 $1,752,000 Annual sales $ 930,000 $1,500,000 Rate of gross profit on sales 30% 40% Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. In as much as your bank has reached its quota for loans of this type, only one of these requests is to be granted. Instructions Which of the two companies, as judged by the information given above, would you recommend as thebetter risk and why? Assume that the ending account balances are representative of the entire year.
CA24-2 (Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems. In connection with her examination of Rem s financial statements for the year ended December 31, 2007, Maggie Zeen, CPA, completed field work 2 weeks ago. Ms. Zeen now is evaluating the significance of the following items prior to preparing her auditor s report. Except as noted, none of these items have been disclosed in the financial statements or notes. Item 1 A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $420,000. From that date through December 31, 2007, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2007. Item 2 Recently Rem interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2006, discontinued for all of 2007 to finance purchase of equipment for the company s new plant, and resumed in the first quarter of 2008. In the annual report dividend policy is to be discussed in the president s letter to stockholders. Item 3 A major electronics firm has introduced a line of products that will compete directly with Rem s primary line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor s line will be of comparable quality but priced 50% below Rem s line. The competitor announced its new line during the week following completion of field work. Ms. Zeen read the announcement in the newspaper and discussed the situation by telephone with Rem executives. Rem will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but willpermit recovery of only a portion of fixed costs. Item 4 The company s new manufacturing plant building, which cost $2,400,000 and has an estimated life of 25 years, is leased from Ancient National Bank at an annual rental of $600,000. The company is obligated to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancellable lease, the company has the option of purchasing the property for $1. In Rem s income statement the rental payment is reported on a separate line. Instructions For each of the items above discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client.