Question

Calculate net debt. Use only the information provided.

Ending cash and cash equivalents 2,000.0 Beginning long term bank debt 7,500.0 Long term bank debt repayment 500.0 Bonds (ending balance) 750.0 Deferred tax liability (ending balance) 150.0 Revolving credit facility drawn down (ending balance) 120.0

Select one: 6,520.0 6,020.0 6,370.0 5,870.0

Answer 1

Deferred tax liability is used when something is taxable under tax concepts but not taxable as per accounting concepts. Similarly, this difference creates deferred tax asset or liability depending upon their nature.

The items mentioned in the question nowhere impacts deferred tax liability or asset. Hence, any amount of this nature will not affect the calculations and will be ignored.

Net debt means debt reduced by all means by which is can be paid.

Here,

Beginning long term bank debt is 7,500

Band debt repaid during the period is 500

So,

Net closing long term bank debt is 7,000.

Bonds ending balance is 750

Revolving credit facility balance is 120

Thus total borrowings are total of above three

= 7,000 + 750 + 120 = 7,870

Ending cash and cash equivalents balance is 2,000 as given

This cash balance can be used for repayments. Thus, net debt = 7,870 - 2,000 = 5,870

Ending Net Debt is 5,870.

Fourth option or option D (As per chronology).