Question

At December 31, 2011, Bouvier Corp. has assets of $10 million, liabilities of $6 million, common shares of $2 million (representing 2 million common shares of $1.00 par), and retained earnings of $2 million. Net sales for the year 2011 were $18 million, and net income was $800,000. As one of the auditors of this company, you are making a review of subsequent events on February 13, 2012, and you find the following.
1. On February 3, 2012, one of Bouvier’s customers declared bankruptcy. At December 31, 2011, this company owed Bouvier $300,000, of which $40,000 was paid in January 2012.
2. On January 18, 2012, one of the client’s three major plants burned.
3. On January 23, 2012, a strike was called at one of Bouvier’s largest plants and it halted 30% of 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 Bouvier’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 Bouvier’s products, but at a price 30% lower. Bouvier officials say they will meet the lower prices, which are barely high enough to cover variable and fixed manufacturing and selling costs.
5. Merchandise traded in the open market is recorded in the company’s records at $1.40 per unit on December 31, 2011. This price held for two weeks after the release of an official market report that predicted vastly excessive supplies; however, no purchases were made at $1.40. The price throughout the preceding year had been about $2.00, which was the level experienced over several years. On January 18, 2012, the price returned to $2.00 after public disclosure of an error in the official calculations of the prior December—the correction erased the expectations of excessive supplies. Inventory at December 31, 2011, was on a lower of cost or net realizable value basis.


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  • CreatedAugust 23, 2015
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