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.
a-2. 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.
  

Answer 1