The following information was drawn from the annual report of Machine Imports Company (MIC). For the Years
Question:
The following information was drawn from the annual report of Machine Imports Company (MIC).
For the Years | ||||||||
Year 1 | Year 2 | |||||||
Income Statement | ||||||||
Revenues | $ | 735,000 | $ | 816,600 | ||||
Operating expenses | 585,000 | 642,600 | ||||||
Income from continuing operations | 150,000 | 174,000 | ||||||
*Infrequent item—lottery win | 75,000 | |||||||
Net income | $ | 150,000 | $ | 249,000 | ||||
Balance Sheet | ||||||||
Assets | $ | 1,083,000 | $ | 1,083,000 | ||||
Liabilities | $ | 249,000 | $ | 0 | ||||
Stockholders’ equity: | ||||||||
Common stock | 465,000 | 465,000 | ||||||
Retained earnings | 369,000 | 618,000 | ||||||
Total liabilities and stockholders’ equity | $ | 1,083,000 | $ | 1,083,000 | ||||
*By definition, Infrequent items are not likely to recur in the future.
Required
a-1. Compute the percentage of growth in net income from Year 1 to Year 2.
b. Can stockholders expect a similar increase between Year 2 and Year 3?
c. Assuming that MIC experiences the same percentage of growth from Year 2 to Year 3 as it did from Year 1 to Year 2, determine the amount of income from continuing operations that the owners can expect to see on the Year 3 income statement.
d. During Year 3, MIC experienced a $59,000 loss due to storm damage. Liabilities and common stock were unchanged from Year 2 to Year 3. Use the information that you computed in Requirement c plus the additional information provided in the previous two sentences to prepare an income statement and balance sheet as of December 31, Year 3.