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Morlan Corporation is preparing its December 31, 2017, financial statements. Two events that occurred between December 31, 2017, and March 10, 2018, when the statements were issued, are described below.

  1. A liability, estimated at \(160,000 at December 31, 2017, was settled on February 26, 2018, at \)170,000.
  2. A flood loss of $80,000 occurred on March 1, 2018.

What effect do these subsequent events have on 2017 net income?

Short Answer

Expert verified

As a result of the liability adjustment, net income will decline by $10,000.

Step by step solution

01

Meaning of Financial Statements

Financial statements are statements that are prepared to determine the position of accrued profit or loss, resources, and obligations on a specific day.

02

Explaining the effect of subsequent events that have on 2017 net income

The change in liability would result in a $10,000 ($160,000 - $170,000) decrease in net income. Settlement of liability is the type of consequential event that gives additional evidence about the terms as on the balance sheet date. A flood loss ($80,000) is an opportunity that demonstrates conditions that did not exist at the balance sheet date but is due as of that date and does not require financial statement modifications.

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Most popular questions from this chapter

Answer each of the questions in the following unrelated situations.

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An annual report of Ford Motor Corporation states, โ€œNet income a share is computed based upon the average number of shares of capital stock of all classes outstanding. Additional shares of common stock may be issued or delivered in the future on conversion of outstanding convertible debentures, exercise of outstanding employee stock options, and for payment of defined supplemental compensation. Had such additional shares been outstanding, net income a share would have been reduced by 10ยข in the current year and 3ยข in the previous year. . . . As a result of capital stock transactions by the company during the current year (primarily the purchase of Class A Stock from Ford Foundation), net income a share was increased by 6ยข.โ€ What information is provided by this note?

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Instructions

Discuss how the preceding subsequent events should be reflected in the 2017 financial statements.

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.โ€™s operations.

(\(000 omitted)

2018

2017

2016

2015

2014

Sales revenue

\)20,000

\(16,000

\)14,000

\(6,000

\)4,000

Net income

2,400

14,000

800

700

250

Average total assets

22,000

19,000

11,500

4,200

3,000

Current assets

8,000

6,000

3,000

1,200

1,000

Working capital

3,600

3,200

1,200

500

400

Common shares:

Number of shares

Outstanding (000)

Average market price

2,000

\(9

2,000

\)6

2,000

$4

20

-

20

-

Instructions

  1. Comment on the appropriateness of declaring a cash dividend at this time, using the ratios computed in part (b) as a major factor in your analysis.
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