Case 13.5 (Larsen, 10th Edition adapted) Interim Reporting Nanson Company, a publicly owned corporation listed on a major stock exchange, forecasted operations for the fiscal year ending December 31 as shown in the following forecasted income statement: Nanson Company Forecasted Income Statement For the Year Ended December 31 Net Sales (1,000,000 units) $10,400,000 Cost of Goods Sold 3,600,000 Gross Margin on Sales 6,800,000 Operating Expenses 1,400,000 Operating Income 5,400,000 Interest Expense 200,000 Income before Income Taxes 5,200,000 Income Taxes Expense 2,860,000 Net Income $ 2,340,000 Basic Earnings per Share of Common Stock $ 23.40 Nanson has operated profitably for many years and has experienced a seasonal pattern of sales volume and production similar to the following ones forecasted for the year: Sales volume is expected to follow a quarterly pattern of 10%, 20%, 35%, and 35%, respectively, because of the seasonality of the industry. Also, because of production and storage capacity limitations, it is expected that production will follow a pattern of 20%, 25%, 30%, and 25%, per quarter, respectively. At the conclusion of the first quarter, the controller of Nanson prepared and issued the following interim income statement: Nanson Company Income Statement For the Quarter Ended March 31 Net Sales $1,040,000 Cost of Goods Sold 360,000 Gross Margin on Sales 680,000 Operating Expenses and Losses Operating Expenses 50,000 Loss from Warehouse Explosion 175,000 Income before Income Taxes 455,000 Income Taxes Expense 250,250 Net Income $ 204,750 Basic Earnings per Share of Common Stock $ 2.0475 Additional information: The following additional information was available for the first quarter just completed, but was not included in the information released by Nanson: 1. The operating expenses were forecasted on a basis of $900,000 fixed expenses for the year plus $0.50 variable expenses per unit sold. Production for during the first quarter was 200,000 units, of which 100,000 units were sold. 2. Nanson currently owes $2,000,000 on 10% bonds payable that mature in 15 years. Interest is paid annually on December 31. 3. The warehouse explosion loss met the conditions of an unusual loss. The warehouse had a carrying amount of $320,000; $145,000 was recovered from insurance on the warehouse. No other gains or losses were anticipated during the year from similar events or transactions, nor has Nanson had any similar losses in preceding years. 4. The effective rate for federal and state income taxes combined was expected to average 55% of pretax financial income for all quarters. There were no permanent differences between pretax financial income and taxable income. 5. Basic earnings per share of common stock was computed on the basis of 100,000 shares of common stock outstanding. Nanson has only one class of common stock issued, no stock option plans, and no warrants to acquire common stock outstanding. The $2,000,000 bond issue has a conversion clause allowing the bondholders to convert the bonds into common stock. The bonds were issued at par for $2,000,000. Each $1,000 bond may be converted into 100 shares of $7 par common stock. The current market price of the common stock is $10 per share. Questions: 1. Identify the weaknesses in form and content of Nanson Companys interim income statement, without reference to the additional information. 2. For each of the five items of additional information, indicate the preferable treatment for interim reports and explain why that treatment is preferable. 3. Prepare Nansons interim income statement for the first quarter with all the necessary disclosures as required by GAAP.