At year-end 2013, Wallace Landscaping’s total assets were $1.4 million and its a
ID: 2725862 • Letter: A
Question
At year-end 2013, Wallace Landscaping’s total assets were $1.4 million and its accounts payable were $435,000. Sales, which in 2013 were $2.2 million, are expected to increase by 30% in 2014. 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 $460,000 in 2013, and retained earnings were $225,000. Wallace has arranged to sell $195,000 of new common stock in 2014 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 2014. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 7%, and 60% of earnings will be paid out as dividends.
What was Wallace's total long-term debt in 2013? Round your answer to the nearest dollar.
$
What were Wallace's total liabilities in 2013? Round your answer to the nearest dollar.
$
How much new long-term debt financing will be needed in 2014? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar.
$
Explanation / Answer
Preliminary calculations.
Asset as % to sales in 2013 = 1.4 mn/2.2 Mn = 64%. Therefore , asset for 2014 = 64% of $ 2.86 Mn. 2014 sale of $ 2.86 Mn is calculated by adding 30% to 2013 sales figures.
Similarly accounts payable % to sales in 2013= 20%. Therefore , acounts payable for 2014 = 20% of $ 2.86 Mn i.e, & 565,500.
Total Long term debt calculation for 2013 = Total assets - Current Liabilities - Shareholder's equity.
For 2013
( shareholders equity= Common stock + Retained earnings)
Long term debt for 2013 = 1,400,000.00 - 435,000.00 - 685,000.00 = $ 280,000.00
Total liabilities for 2014 = Accounts payable + dividend = 565,500 + 120,120 = $ 685,620.
Dividend is 60 % of profit margin on sales and profit margin on sales is 7% os sales , which is calculated above in preliminary calculation.
Long term debt financing for 2014.
To calculate the above we need to know the retained earnings for 2014
which is , = retained earnings for 2013 + Profit margin for 2014 - dividend payout for 2014.
= 225,000+200,200-120120 = $ 305,080.
Common stock for 2014 is stock for 2013 + new issue $ 195,000
Long term debt for 2014 using the same formulae for 2013 = 1,820,000- 655,000-305,080- 565,500 = $ 294,420.
Asset- common stock-retained earnings-accounts payable= long term debt.
Therefore, new debt in 2014 = 280,000- 294,420 = $ 14,420
2013 2014 $ $ Total asset 1,400,000.00 1,820,000.00 Accounts payable 435,000.00 565,500.00 Sales 2,200,000.00 2,860,000.00 Common Stock 460,000.00 655,000.00 Retained Earnings 225,000.00 Profit margin on sales 154,000.00 200,200.00 Divedend payout 92,400.00 120,120.00Related Questions
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