Question

AA

At year-end 2016, Wallace Landscaping's total assets were $2.0 million and its accounts payable were $355,000. Sales, which in 2016 were $2.4 million, are expected to increase by 20% in 2017. 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
$485,000 in 2016, and retained earnings were $260,000. Wallace has arranged to sell $100,000 of new common stock in 2017 to rneet some of its financing needs. The remainder of its financing needs
will be met by issuing new long-term debt at the end of 2017. (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 4%, and 50% of earnings will be paid out as dividends.
a. What was Wallace's total long-term debt in 2016? Round your answer to the nearest dollar.
What were Wallace's total liabilities in 2016? Round your answer to the nearest dollar.
b. How much new long-term debt financing will be needed in 2017? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar.

Answer 1

At year-end 2016, Wallace Landscaping’s total assets were $2.0 million and its accounts payable were $355,000. Sales, which in 2017 were $2.4 million, are expected to increase by 20% in 2017. 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 $485,000 in 2016, and retained earnings were $260,000. Wallace has arranged to sell $100,000 of new common stock in 2017 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 2017. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 50% of earnings will be paid out as dividends.

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What were Wallace’s total long-term debt and total liabilities in 2016?

Balance Sheet as of December 31, 2016

Total Assets $2,170,000.00

Accounts Payable $355,000

Total Current Liabilities $355,000

Long-term debt $900,000

Total Liabilities $1,255,000

Common Stock $485,000

Retained Earnings $260,000

Total Common Equity $745,000

Total Liabilities & Equity $2,000,000

Income Statement for December 31, 2016

Sales $2,400,000

The total assets must equal the total liabilities and equity. Accounts payable of $355,000 is the only current liabilities. It is understandable that Wallace has a long-term debt as it is planning to issue new long-term debt at the end of 2017. The total liabilities should include the long-term debt and the total current liabilities.

Total Assets = Total Liabilities & Equity

Answer: Total long-term debt in 2016 = $900,000; Total Liabilities in 2016 = $1,255,000

a. Compute for the total liabilities:

Total liabilities = Total Liabilities & Equity ? Total Common Equity

= $2,000,000 ? $745,000

Total Liabilities = $1,255,000

b. Computing for total long-term debt:

Total long term debt = Total liabilities ? Total current liabilities

= $1,255,000 ? $355,000

Total long-term debt = $900,000

b. How much new long-term debt financing will be needed in 2017?

AFN = (A*/S₀)?S - (L*/S₀)?S – PM*S₁*(1 - d)

= (2,000,000/2,400,000)*$480,000 – (355,000/2,400,000)*$480,000 - 0.04($2,880,000)(1 - 0.5)

= (0.8333)($480,000) - (0.1479)($480,000) - ($115,200)(0.5)

= $400,000 - $71,000 - $57,600

= $271,400.

New long-term debt = AFN- NEW STOCK

= $271,400-$100,000

= $171,400