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timer Asked: Dec 12th, 2014

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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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