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Question Description
CA24-4 (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 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.
1. 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.
2. On January 18, 2015, one of the three major plants of the client burned.
3. 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.
4. A major electronics enterprise has introduced a line of products that would compete directly with
Coburn’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 Coburn’s products
but at a price 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.
5. 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-of-cost-or-market basis.
6. 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.
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