Balance sheet effects of leasing Two textile companies, McDaniel-Edwards Manufac

Question

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 $100,000. McDaniel-Edwards obtained a 5-year, $100,000 loan at an 11% interest rate from its bank. Jordan-Hocking, on the other hand, decided to lease the required $100,000 capacity from National Leasing for 5 years; an 11% 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 $400,000

Explanation / Answer

McDaniel-Edwards' balance sheet after the asset increase.

New debt ratio of McDaniel-Edwards = 300,000/500,000 = .6

Jordan-Hocking's balance sheet after the asset increase

Debt ratio = 200,000/400,000 = .5

Balance sheet after lease is capitalized:

Jordan-Hocking Balance Sheet:

Debt/assets ratio = 300000/500000 = .6 = 6%.

Debt 300,000 Total asset 500,000 equity 200,000 Total debt and equity 500,000

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.