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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 SHEETAT DECEMBER 31, 2012 (UNADJUSTED)ASSETS:LIABILITIES:Current assets:Current liabilities:Cash$19,740Accounts payable$50,468Accounts receivable (less allowance)24,039Unearned revenue10,000Inventory1,569,500Total current liabilities60,468Prepaid Insurance24,000Long-term liabilities:Total current assets1,637,279Notes Payable250,000Total Liabilities310,468Long-term assets:Property and equipment500,000STOCKHOLDERS’ EQUITY:Less: accumulate depreciation-0-Common stock, no par251,676Total long-term assets500,000Retained Earnings1,575,135Total Stockholders’ equity1,826,811TOTAL ASSETS$2,137,279TOTAL LIAB. AND EQUITY$2,137,279INCOME STATEMENTFOR THE YEAR-ENDED DECEMBER 31, 2012 (UNADJUSTED)Sales$2,233,109Less: selling and admin expenses655,974Rent expense2,000NET INCOME$1,575,135Additional 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 customerhas 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%. Allprincipal 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:Building350,000 (range 30 to 40 years)Furniture130,000 (range 10 to 20 years)Computers20,000 (range 2 to 5 years)TOTAL500,000
* Inventory costs are as follows:Purchase DateUnitsUnit priceTotal price1/1/12500385192,5003/1/12400415166,0005/1/12700450315,0008/1/12500490245,00010/1/12600525315,00012/1/12600560336,0003,3001,569,500Units sold2,900Units left400REQUIREMENTS OF THE CASETask: 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:1Management may receive higher bonuses based on favorable financial results.2If 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).