The balance sheet of the Jackson Company is presented below: Jackson Company Balance Sheet ...

The balance sheet of the Jackson Company is presented below:

Jackson Company Balance Sheet

March 31, 2014

(Millions of Dollars)

Current assets $12 Accounts payable $6

Fixed assets 18 Long-term debt 12

Total $30 Common equity 12

Total $30

For the year ending March 31, 2014, Jackson had sales of $35 million. The common stockholders received all net earnings of the firm in the form of cash dividends, leaving no funds from earnings available to the firm for expansion (assume that depreciation expense is just equal to the cost of replacing worn-out assets).

Construct a pro forma balance sheet for March 31, 2015 for an expected level of sales of $45 million. Assume current assets and accounts payable vary as a percent of sales, and fixed assets remain at the present level. Use notes payable as a source of discretionary financing. (3 pts.)

4) Explain and give examples of spontaneous financing. (1 pt.)

5) Explain, giving examples, discretionary financing. (1 pt.)

6) Explain the difference between operating lease and capital lease. (2 pts.)

7) Discuss 2 reasons why companies engage in mergers. (2 pts.)

Solutions

Expert Solution

Current Assets 15.42 Accounts Payable 9.42

Fixed Assets 18 Long Term 12

Common Stock 12

33.42 33.42

spontaneous financing

Financing which flows with the volume of sales activity during normal business operation that requires no additional assistance from lenders or creditors. The most common resources for this kind of financing include accounts payables and accruals.

Discretionary Financing is a trading facility that allows clients to settle their outstanding purchase at any time up to T+7

Capital Lease	Operating Lease
Lease criteria - Ownership	Ownership of the asset might be transferred to the lessee at the end of the lease term.	Ownership is retained by the lessor during and after the lease term.
Lease criteria - Bargain Purchase Option	The lease contains a bargain purchase option to buy the equipment at less than fair market value.	The lease cannot contain a bargain purchase option.
Lease criteria - Term	The lease term equals or exceeds 75% of the asset's estimated useful life	The lease term is less than 75 percent of the estimated economic life of the equipment
Lease criteria - Present Value	The present value of the lease payments equals or exceeds 90% of the total original cost of the equipment.	The present value of lease payments is less than 90 percent of the equipment's fair market value
Risks and Benefits	Transferred to lessee. Lessee pays maintenance, insurance and taxes	Right to use only. Risk and benefits remain with lessor. Lessee pays maintenance costs
Accounting	Lease is considered as asset (leased asset) and liability (lease payments). Payments are shown in Balance sheet	No risk of ownership. Payments are considered as operating expenses and shown in Profit and Loss statement
Tax	Lessee is considered to be the owner of the equipment and therefore claims depreciation expense and interest expense	Lessee is considered to be renting the equipment and therefore the lease payment is considered to be a rental expense

ekkarill92 answered 3 months ago

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