Problem 20-4 Balance sheet effects of leasing Two textile companies, McDaniel-Ed
ID: 2613016 • Letter: P
Question
Problem 20-4
Balance sheet effects of leasing
Two textile companies, McDaniel-Edwards Manufacturing and Jordan-Hocking Mills, began operations with identical balance sheets. A year later, both required additional manufacturing capacity at a cost of $225,000. McDaniel-Edwards obtained a 5-year, $225,000 loan at an 9% interest rate from its bank. Jordan-Hocking, on the other hand, decided to lease the required $225,000 capacity from National Leasing for 5 years; an 9% return was built into the lease. The balance sheet for each company, before the asset increases, is as follows:
Show the McDaniel-Edwards' balance sheet after the asset increase. Round your answers to two decimal places.
Calculate McDaniel-Edwards' new debt ratio. Round your answer to two decimal places.
5. %
Show the Jordan-Hocking's balance sheet after the asset increase. (Assume lease is kept off the balance sheet.) Round your answers to two decimal places.
Calculate Jordan-Hocking's new debt ratio. Round your answers to two decimal places.
10. %
Show how Jordan-Hocking's balance sheet would have looked immediately after the financing if it had capitalized the lease. Round your answers to two decimal places.
Debt $200,000 Equity 200,000 Total assets $400,000 Total liabilities and equity $400,000Explanation / Answer
Balance Sheet Assets Amount Liabilities Amount Assets $4,00,000 Debt $2,00,000 Equity $2,00,000 Total Assets $4,00,000 Total liabilities & equity $4,00,000 Show the McDaniel-Edwards' balance sheet after the asset increase. Round your answers to two decimal places. Balance Sheet Assets Amount Liabilities Amount Assets $6,25,000 Debt $4,25,000 Equity $2,00,000 Total Assets $6,25,000 Total liabilities & equity $6,25,000 Calculate McDaniel-Edwards' new debt ratio. Round your answer to two decimal places. 5.00% Debt Ratio = Liabilities / Assets = 68.00% Show the Jordan-Hocking's balance sheet after the asset increase. (Assume lease is kept off the balance sheet.) Round your answers to two decimal places. Balance Sheet Assets Amount Liabilities Amount Assets $4,00,000 Debt $2,00,000 Equity $2,00,000 Total Assets $4,00,000 Total liabilities & equity $4,00,000 Calculate Jordan-Hocking's new debt ratio. Round your answers to two decimal places. 10.00% Debt Ratio = Liabilities / Assets = 50.00% Show how Jordan-Hocking's balance sheet would have looked immediately after the financing if it had capitalized the lease. Balance Sheet Assets Amount Liabilities Amount Assets $4,00,000 Debt $2,00,000 Value of leased assets $2,25,000 PV of leased payments $2,25,000 Equity $2,00,000 Total Assets $6,25,000 Total liabilities & equity $6,25,000
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