Morten Metal Limited has assembled past (2020) financial statements (income statement and balance sheet follows) and financial projections for use in preparing financial plans for the coming year (2021).

Information related to financial projections for the year 2021 follows.
(1) Projected sales are $420,000.
(2) Cost of goods sold in 2020 includes $72,000 in fixed costs.
(3) Operating expense in 2020 includes $17,500 in fixed costs.
(4) Interest expense will be $18,000 in 2021.
(5) The firm will pay cash dividend amounting to 25% of net profit after taxes.
(6) Cash and inventories are expected to double.
(7) Marketable securities, long-term debt, and common stock will remain unchanged.
(8) Accounts receivable, accounts payable, and other current liabilities will change in direct response to the change in sales.
(9) During the year, the firm will purchase a delivery vehicle costing $25,000. The depreciation expense on the new vehicle for 2021 will be $7,000.

(10) The tax rate will remain at 25%.

a. Prepare a pro forma income statement for the year ended December 31, 2021, using the fixed cost data given to improve the accuracy of percent-of-sales method.

b. Prepare a pro forma balance sheet as of December 31, 2021, using the information provided and the judgmental approach. Include a reconciliation of retained earnings account.

c. Analyze these statements, and discuss the resulting external financing required.

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Morten Metal Ltd. Income Statement for Year Ended December 31, 2020 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate=25%) Net profits after taxes Less: Cash dividends To retained earnings $350,000 192,500 $157,500 59,500 $ 98,000 14,000 $ 84,000 21,000 $ 63,000 20,000 $ 43,000