At yearend 2016 Wallace Landscapings total assets were 17 mi

At year-end 2016, Wallace Landscaping’s total assets were $1.7 million, and its accounts payable were $385,000. Sales, which in 2016 were $2.1 million, are expected to increase by 20% in 2017. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $390,000 in 2016, and retained earnings were $290,000. Wallace has arranged to sell $105,000 of new common stock in 2017 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2017. (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 3%, and 45% of earnings will be paid out as dividends. What was Wallace\'s total long-term debt in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar. $ What were Wallace\'s total liabilities in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar. $ How much new long-term debt financing will be needed in 2017? (Hint: AFN - New stock = New long-term debt.) Do not round intermediate calculations. Round your answer to the nearest dollar.

Solution

Total assets= Total Liabilities + Shareholder’s Equity

Shareholder’s equity= Common stock + retained earnings

Common stock= $390000

Retained earnings= $290000

Shareholder’s equity= $390000 + $290000

Shareholder’s equity= $680000

And Total assets= $1700000

Total assets= Total Liabilities + Shareholder’s Equity

$1700000= Total Liabilities+$680000

Total Liabilities= $1700000- $680000

Total Liabilities in 2016= $1020000

Current Liabilities= Accounts payable+ Long term debt

$1020000= $385000 + Long Term Debt

Long Term debt= $1020000- $385000

Long Term debt in 2016= $635000

Calculation of long term financing in 2017 is as below:

Sales of 2017= Increase by 20% over 2016

Sales of 2017=$2100000 + 20% * $2100000

Sales of 2017= $2520000

Profit margin= 3% * $2520000

Profit margin=$75600

Retained earnings for 2017= 55%* $75600= $41580

(As 45% is paid in the form of dividends)

Long term debt of 2017= Total assets – common stock- Retained earnings- Accounts payable

Where,

Total Assets (2017)= $1700000* 120%= $2040000

Accounts payable (2017)= $385000*120%= $462000

Common stock (2017)= $390000 + $105000= $495000

Retained Earnings (2017)= $290000+ $41580= $331580

Long term debt of 2017=$2040000-$495000-$331580-$462000= $751420

New long term debt= $751420- $635000= $116420