DTAP a Search this course Ba nmenti Chapter 9 EOC PROBLEMSG

DTAP a Search this course ? Ba nmenti Chapter 9- EOC PROBLEMS-GRADED Check My Work (a At year-end 2015, walace Landscaping\'s total assets were $1.9 millon and its accounts payable were $365,000. Sales, which in 2015 were $3.0 mln, are expected to increase by 15% in 2016. Total assets and accounts payable are proportional to sales, and that relationship wil be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $480,000 in 2015, and retained earnings were $255,000. Wallace has arranged to sell $65,000 of new common stock in 2016 to meet some of its financing needs. The of its financing needs will be met by issuing new long-term debt at the end of 2016. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 79, and 40% of eamngs will be paid out as dividends. a. What was Wallace\'s total long-term debt in 20157 Round your answer to the nearest dollar What were Wallace\'s total liabilities in 20157 Round your answer to the nearest dollar b. How much new long-term debt financing will be needed in 2016? (Hint: AFN New stock New long-term debt.) Round your answer to the nearest dollar. Do not round intermediate Check My Work (1 remaining) 8

Solution

Let us calculate the numbers asked in question first, for which we should understand the basic accounting equation:

Total Assets = Total Liabilities + Total Shareholders\' Equity

Where, Total Liabilities = Accounts payable + Long term debt; Total Shareholders\' Equity = Total common equity + Retained earnings.

So, in 2015,

1,900,000 = 365,000 + Long term debt + 480,000 + 255,000

Long term debt = $800,000 --> Answer to Part a

Total liabilities = Accounts payable + Long term debt = 365,000 + 800,000 = $1,165,000 ---> Answer to Part b

Now, we need to prepare a forecasted statement for 2016.

Sales in 2015 = $3,000,000

Sales in 2016 = $3,000,000 * (1 + 15%) = $3,450,000

Net profit margin = Net Income/Sales = 7%

Therefore, Net Income in 2016 = 7% * $3,450,000 = $241,500

Dividend payout = 40% => Retention Ratio = 1 - 40% = 60%

Therefore, addition to retained earnings = 60% * 241,500 = $144,900

As given in question, total assets and accounts payable increase in same proportion as in sales.

Total Assets in 2016 = 1,900,000 * (1 + 15%) = 2,185,000

Accounts payable in 2016 = 365,000 * (1 + 15%) = 419,750

With the same concept,

Total Assets = Total Liabilities + Total Shareholders\' Equity

2,185,000 = 419,750 + Long term debt + Common Stock + Retained Earnings + Additional Retained Earnings + New Stock Issuance

2,185,000 = 419,750 + Long term debt + 480,000 + 255,000 + 144,900 + 65,000

Long term debt required = $820,350

New debt required = Total Long term debt required - Existing Long term debt required

New debt required = 820,350 - 800,000 = $20,350 ---> Long term debt required. Answer to Part c