Question

Problem 12-09 Financing Deficit Garlington Technologies Inc.'s 2016 financial statements are shown below: Balance Sheet as of December 31, 2016 $360,000 156,000 180,000 Cash $ 180,000 Accounts payable Receivables 360,000 Notes payable Inventories 720,000 Line of credit Total current assets $1,260,000 Accruals Fixed assets 1,440,000 Total current liabilities Common stock Retained earnings Total assets $2,700,000 Total liabilities and equity Income Statement for December 31, 2016 $ 696,000 1,800,000 204,000 $2,700,000 Sales Operating costs $3,600,000 3,279,720 $ 320,280 18,280 EBIT Interest Pre-tax earnings Taxes (40%) $ 302,000 120,800 Net income 181,200 Dividends $ 108,000 Suppose that in 2017 sales increase by 5% over 2016 sales and that 2017 dividends will increase to $190,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 11%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations. Garlington Technologies Inc. Pro Forma Income Statement December 31, 2017

Answer 1

Dividend is increased to $190,000
Dividend = $190,000.

Addition to RE: = Net income - dividends = $191,480 - $190,000 = $1,480.

Notes payable will not change.
Thus, Notes payable = $156,000.

Total current liabilities = Accounts payable + Notes payable + Accruals
= $378,000 + $156,000 + $189,000
= $723,000.

Retained earnings = $204,000 + $1,480 = $205,480.