Question

Problem 12-09
Financing Deficit

Garlington Technologies Inc.'s 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016

Cash	$   180,000		Accounts payable	$   360,000
Receivables	360,000		Notes payable	156,000
Inventories	720,000		Line of credit	0
Total current assets	$1,260,000		Accruals	180,000
Fixed assets	1,440,000		Total current liabilities	$   696,000
			Common stock	1,800,000
			Retained earnings	204,000
Total assets	$2,700,000		Total liabilities and equity	$2,700,000

Income Statement for December 31, 2016

Sales	$3,600,000
Operating costs	3,279,720
EBIT	$  320,280
Interest	18,280
Pre-tax earnings	$  302,000
Taxes (40%)	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 $150,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 14%, 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
Sales		$
Operating costs		$
EBIT		$
Interest		$
Pre-tax earnings		$
Taxes (40%)		$
Net income		$
Dividends:		$
Addition to RE:		$

Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2017
Cash		$
Receivables		$
Inventories		$
Total current assets		$
Fixed assets		$
Total assets		$
Accounts payable		$
Notes payable		$
Accruals		$
Total current liabilities		$
Common stock		$
Retained earnings		$
Total liabilities and equity		$

Answer 1