At year-end 2013, Wallace Landscaping’s total assets were $1.6 million and its a
ID: 2768466 • Letter: A
Question
At year-end 2013, Wallace Landscaping’s total assets were $1.6 million and its accounts payable were $320,000. Sales, which in 2013 were $2.5 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 $490,000 in 2013, and retained earnings were $270,000. Wallace has arranged to sell $190,000 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 3%, and 55% 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
1. Total assets of Wallace Landscapings $ 1,600,000
Total liabilities and Equity should also be $ 1,600,000
Total Long term Debt for the year 2013 = Total Liabilities and Equity - Accounts payble - Stock holders Equity (i.e Common stock + Retianed earnings
= $1,600,000 - 320,000 - 793,750 (i.e Common stock 490,000 + Retained earnings 303,750)
= $486,250; Hence, Long term debt for the year 2013 is $486,250
Working Note:
Retained Earnings = Opening balance + profit for the year 2013 - Devidend paid
= $270,000+ 75,000 - 41,250 = 303,750
Profit for the year 2013 = Sales x 3% = 2,500,000 x 3% = 75,000
Dividend paid = Profit x 55% = $75,000 x 55% = $41,250
2. Total lliabilities = Current liabilities + Long term debt = $320,000 + 486,250 = $ 806,250
3. New long term debt = Additional funds needed (AFN) - New common stock
= $340,125 - 190,000 = $150,125
Notte: AFN = Increase in assets - increase in accounts payable - retained earnings for 2014
= $480,000 - 96,000 - 43,875 = $340,125
Working Notes:
1 Sales for the year 2014 = Sales for the year 2013 + 30% increase = $2,500,000 x 30% = 3,250,000
2. Total Aseets for the year 2014 = Total assets for the year 2014 + 30% increase (i.e proportional increase in sales)
= $1,600,000 +30% = $2,080,000
3. Accounts payble for the year 2014 = Accounts payable for 2013 + 30%
= $320,000 + 30% = $416,000
4. Profit for the year = Sales for 2014 x 3% = 3,250,000 x3% = 97,500
5. Retained earnings = Profit margin x 45% = 97,500 x 45% = $43,875
6. Total long term debt for the year 2014 = Total Liabilities - Accounts payable - common stock - Retained earnings
= $2,080,000 - 416,000-680,000 - 347,625 = 636,375
7. Retained earnings balance for the year 2014 = Opening balance + profit for 2014 - Dividend paid for 2014
= $303,750 + 97,500-53,625 = $347,625
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