Question

The management of a firm determine that they need to acquire additional equipment costing $10,000,000. The firm’s current B/S is below (in thousands).

Assets		Liabilities
Cash	$2,000	Accounts Payable	$5,000
Accounts Receivable	3,000	Salary Payable	10,000
Supplies	2,000	Current Liabilities	15,000
Prepaid Rent	2,000	Long-term Note	12,000
Current Assets	9,000	Total Liabilities	27,000
Equipment	25,000	Equity
Less A/D	(5,000)	Contributed Capital	5,000
Building	10,000	Retained Earnings	6,000
Less A/D	(1,000)	Total Equity	11,000
Long-term Assets	29,000
Total Assets	$38,000	Liabilities & Equity	$38,000

Question:

The firm is considering several options to purchase the equipment: paying $2,000,000 in cash and creating a notes payable of $8,000,000 that they must repay in a year; or, taking out a 5 year loan from the bank for the $10,000,000. Ignoring the cost of interest, how would each option affect the balance sheet? Which option would you recommend management pursue? Is there enough information available to create an income statement?

Answer 1