At year-end 2015, Wallace Landscaping’s total assets were $1.9 million and its a
ID: 2612553 • Letter: A
Question
At year-end 2015, Wallace Landscaping’s total assets were $1.9 million and its accounts payable were $440,000. Sales, which in 2015 were $2.7 million, are expected to increase by 30% in 2016. 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 $400,000 in 2015, and retained earnings were $230,000. Wallace has arranged to sell $140,000 of new common stock in 2016 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2016. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 3%, and 45% of earnings will be paid out as dividends.
How much new long-term debt financing will be needed in 2016? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar. Do not round intermediate calculations.
Explanation / Answer
Wallace Total LOng term Debt in 2015
Assets
Amount($)
Liabilities
Amount($)
Total Assets
1900000
Accounts Payable
440000
Long Term Debt
830000
Common Stock
400000
Retained Earnings
230000
Long Term Debt = Total Assets - (Accounts Payable + Common Stock+ Retained Earnings)
Long Term Debt = 1900000-(440000+400000+230000) = $830000
Wallace Total Long Term debt in 2015 = $830000
Wallace Total Liabilities in 2015 = 440000+830000 = $1270000
2016
Assets
Amout($)
Liabilities
Amount($)
Total Assets(Proportional to increase in 30% of sales
2470000
Accounts Payable
429000
long term Debt
1440600
Common Stock (400000-140000)
260000
Retained Earnings (BRE+Profit-Dividend)
340400
Total Assets
2470000
Total Liabilities
2470000
Ending Retained Earnings = BEg Retained Earnings+Profit -Dividend
Ending RE =230000+(3% of230000)-(45% of 230000) =$340400
Long term Debt = Total Assets-(AccountsPAyable +Common Stock +Retained Earnings)
Long Term Debt in 2016 = $1440600
Assets
Amount($)
Liabilities
Amount($)
Total Assets
1900000
Accounts Payable
440000
Long Term Debt
830000
Common Stock
400000
Retained Earnings
230000
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