Question

Problem 4-25 Capacity Usage and Growth [LO2] - Do not sell fixed assets

The most recent financial statements for Retro Machine, Inc., follow. Sales for 2017 are projected to grow by 10 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets and accounts payable increase spontaneously with sales.

RETRO MACHINE, INC. 2016 Income Statement
Sales				$	756,800
Costs					585,600
Other expenses					20,800
Earnings before interest and taxes				$	150,400
Interest paid					12,800
Taxable income				$	137,600
Taxes (35%)					48,160
Net income				$	89,440
Dividends	$	27,004
Addition to retained earnings		62,436

RETRO MACHINE, INC. Balance Sheet as of December 31, 2016
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	26,290		Accounts payable	$	64,240
Accounts receivable		37,910		Notes payable		17,220
Inventory		79,330		Total	$	81,460
Total	$	143,530		Long-term debt	$	143,600
Fixed assets				Owners’ equity
Net plant and equipment	$	374,740		Common stock and paid-in surplus	$	142,000
				Accumulated retained earnings		151,210
				Total	$	293,210
Total assets	$	518,270		Total liabilities and owners’ equity	$	518,270

In 2016, the firm operated at 85 percent of capacity. Construct the pro forma income statement and balance sheet for the company. Assume that the company cannot sell fixed assets. This implies that asset utilization may remain less than 100 percent next year as well.

Answer 1