Question

At December 31, 2017, 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 \(2,000,000. Net sales for the year 2017 were \)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, 2018, and you find the following.

1. On February 3, 2018, one of Coburn’s customers declared bankruptcy. At December 31, 2017, this company owed Coburn \)300,000, of which $60,000 was paid in January 2018.

Instructions

State in each case how the 2017 financial statements would be affected, if at all.

Short answer

A loss of $240,000 should be adjusted in financial statements.

Step-by-step solution

Meaning of Balance sheet

The balance sheet is a report that lists all of an entity's assets, liabilities, and equity as of a specific date. Lenders, investors, and creditors commonly use it to evaluate a company's liquidity. A balance sheet is one of the papers that make up a company's financial statements.

Explaining the effect in the financial statements

Financial accounts must be reconciled to reflect a loss estimated at $240,000 in balances receivable. As of December 31, 2017, this adjustment should reduce accounts receivable to their realizable value.