Preparing Martin Manufacturings 2015 Pro Forma Financial Statements. To improve its competitive position, Martin Manufacturing is planning to implement a major equipment modernization program. Included will be replacement and modernization of key manufacturing equipment at a cost of $400,000 in 2015. The planned program is expected to lower the variable cost per unit of finished product. Terri Spiro, an experienced budget analyst, has been charged with preparing a forecast of the firms 2015 financial position, assuming replacement and modernization of manufacturing equipment. She plans to use the 2014 financial statements, along with the key projected financial data summarized in the table below

Questions:

1. Use the historical and projected financial data provided to prepare a pro forma income statement for the year ended December 31, 2015. (Hint: Use the percent of sales method to estimate all values except depreciation and interest expense, which have been estimated by management and included in the table.)

2. Use the projected financial data along with relevant data from the pro forma income statement prepared in part (1) to prepare the pro forma balance sheet at December 31, 2015. (Hint: Use the judgmental approach.)

3. Will Martin Manufacturing Company need to obtain external financing to fund the proposed equipment modernization program? Explain.

Martin Manufacturing Company Income Statement For the Year Ended December 31, 2014 Martin Manufacturing Company Balance Sheet December 31, 2014 abilities and Stockholde Current liabilities Accounts payable Notes payable Accruals Total Current Liabilities $ 616,000 Sales revenue $5,075,000 Current assets Cash Accounts receivable Less: Cost of goods sold 230,000 311,000 S 25,000 Gross Profit $1,371,000 805,556 51,531,181 $2,093,819 Less: Operating expenses Selling expense General and administrative expenses $650,000 416,000 152,000 Total current assets Gross fixed assets (at cost) Long-term debt Total liabilities $1,165 250 $1,781,250 Depreciation expense Less: Accumulated depreciation 500,000 Total operating expense Operating profit 1218,000 153,000 Net Fixed assets Total assets Stockholders' Equity Preferred stock (2,500 Less: Interest expense Net profit before taxes 60,000 Shares) $ 50,000 Less: Income Taxes Common stock (100,000 Net profit Shares$4.00 par) 400,000 593,750 Paid in capital Retained earnings Preferred stock dividends of $3,000 were paid. **EPS for common stock is $0.33 Total Liabilities and Stockholders' Equity 3,125,000 The firm's 100,000 outstanding shares of common stock closed 2014 at a price of $11.38 Per share. Data Table: Projected financial data for 2015 Sales revenue Minimum cash balance Inventory turnover (times) Average collection period $6,500,000 25,000 7.0 50 days 400,000 20,000 185,000 Total dividend payments Depreciation expense Interest expense Accounts payable increase Accruals and long-term debt Notes payable, preferred and 97,000 20% Unchanged Common stock