Below is a hypothetical unadjusted balance sheet and

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Below is a hypothetical Unadjusted Balance Sheet and Income Statement for the year ended December 31, 2012. Additional information is provided allowing students to prepare both an Adjusted Balance sheet and Income Statement making decisions under different sets of assumptions based on their assigned role:
BALANCE SHEET AT DECEMBER 31, 2012 (UNADJUSTED) ASSETS: LIABILITIES: Current assets: Current liabilities: Cash $19,740 Accounts payable $50,468 Accounts receivable (less allowance) 24,039 Unearned revenue 10,000 Inventory 1,569,500 Total current liabilities 60,468 Prepaid Insurance 24,000 Long-term liabilities: Total current assets 1,637,279 Notes Payable 250,000 Total Liabilities 310,468 Long-term assets: Property and equipment 500,000 STOCKHOLDERS’ EQUITY: Less: accumulate depreciation -0- Common stock, no par 251,676 Total long-term assets 500,000 Retained Earnings 1,575,135 Total Stockholders’ equity 1,826,811 TOTAL ASSETS $2,137,279 TOTAL LIAB. AND EQUITY $2,137,279 INCOME STATEMENT FOR THE YEAR-ENDED DECEMBER 31, 2012 (UNADJUSTED) Sales $2,233,109 Less: selling and admin expenses 655,974 Rent expense 2,000 NET INCOME $1,575,135 Additional Information: * Prepaid Insurance was paid on January 1, 2012. The policy offers coverage for two years. * Unearned Revenue represents a deposit received from a customer on December 20, 2012. The customer has received part of the order. One item costing $2,000 is on backorder and has not been shipped to the customer yet. * A one-year Note Payable for $250,000 was obtained on September 1, 2012. The interest rate is 8%. All principal and interest are due on September 1, 2013. * The gross amount of Accounts Receivable totaled $24,039. (The firm’s credit policy requires payment within 60 days). Industry guidelines indicate uncollectible accounts are generally in the range of 1 to 12% of the ending accounts receivable balance. (Note that management very often sets percentages based on an aging schedule, not just on the total accounts receivable balance, but for ease of presenting solutions these percentages will be used). * The company uses Straight-Line Depreciation for its Plant and Equipment. Plant and Equipment costs consist of the following: Building 350,000 (range 30 to 40 years) Furniture 130,000 (range 10 to 20 years) Computers 20,000 (range 2 to 5 years) TOTAL500,000
* Inventory costs are as follows: Purchase Date Units Unit price Total price 1/1/12 500 385 192,500 3/1/12 400 415 166,000 5/1/12 700 450 315,000 8/1/12 500 490 245,000 10/1/12 600 525 315,000 12/1/12 600 560 336,000 3,300 1,569,500 Units sold 2,900 Units left 400 REQUIREMENTS OF THE CASE Task: Prepare an adjusted Income Statement and Balance Sheet. Use a statutory tax rate of 35% to record income taxes payable and income tax expense. If you are an aggressive manager you should use aggressive estimates and attempt to report the highest Net Income possible since: 1 Management may receive higher bonuses based on favorable financial results. 2 If reported Net Income is above analyst’s expectation of net income, then share price may increase and management’s stock options and stock holdings will increase in value. However, if reported earnings are below expectations investors are disappointed and stock prices may fall (Brown and Caylor, 2005).

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