Question

Company Baldwin invested $21,700,000 in plant and equipment last year. The plant investment was funded with bonds at a face value of $16,342,336 at 12.3% interest, and equity of $5,357,664. Depreciation is 15 years straight line. For this transaction alone which of the following statements are true?

a.Since the new plant was funded with debt and equity, on the Balance sheet Retained Earnings decreased by $5,357,664, the difference between the investment $21,700,000 and the bond $16,342,336.
	b. Cash was pulled from retained earnings to cover the $5,357,664 difference between the plant purchase and bond issue.
	c. On the Balance sheet, Long Term Debt changed by $16,342,336.
	d. On the Balance sheet, Plant & Equipment increased by $21,700,000.
	e. Buying the plant had no net effect on the Cash account, because the plant was paid for by the bond plus retained earnings.
	f. Cash went down by $21,700,000 when the plant was purchased.
	g. Cash went up when the Bond was issued by $16,342,336.
	h. Depreciation increased by $1,446,667.

Answer 1

c. On the Balance sheet, Long Term Debt changed by $16,342,336. TRUE

yes long term debt went UP by 16342336

d. On the Balance sheet, Plant & Equipment increased by $21,700,000. TRUE

Yes Plant & Equipment went UP by 21700000

h. Depreciation increased by $1,446,667. True

dep per year straight line 15yrs is plant and equipment cost / useful life

21700000 / 15

1446667

Explanation for false statements:

a.Since the new plant was funded with debt and equity, on the Balance sheet Retained Earnings decreased by $5,357,664, the difference between the investment $21,700,000 and the bond $16,342,336. FALSE

Retained Earnings (RE) = Beginning RE + Net Income - Dividends

I am ASSUMING that there was a new equity issue. Therefore retained earnings won't be affected

b. Cash was pulled from retained earnings to cover the $5,357,664 difference between the plant purchase and bond issue. FALSE

I am ASSUMING that there was a new equity issue. Therefore retained earnings won't be affected

e. Buying the plant had no net effect on the Cash account, because the plant was paid for by the bond plus retained earnings.FALSE

I am ASSUMING that there was a new equity issue. Therefore retained earnings won't be affected THOUGH Companies retain earnings in order to invest them into areas where the company can create growth opportunities, such as buying new machinery. But it is not explicitly mnentioned in the question.

f. Cash went down by $21,700,000 when the plant was purchased. FALSE

I am ASSUMING that there was a new bond and equity issue.

g. Cash went up when the Bond was issued by $16,342,336. FALSE

the bond issue was primarily for purchase of equipment