Question

Below are the year-end balance sheets for Lowell Enterprises:

Assets:	2018	2017
Cash	$   200,000	$   170,000
Accounts receivable	864,000	700,000
Inventories	2,000,000	1,400,000
Total current assets	$3,064,000	$2,270,000
Net fixed assets	6,000,000	5,600,000
Total assets	$9,064,000	$7,870,000
Liabilities and equity:
Accounts payable	$1,400,000	$1,090,000
Notes payable	1,600,000	1,800,000
Total current liabilities	$3,000,000	$2,890,000
Long-term debt	2,400,000	2,400,000
Common stock	3,000,000	2,000,000
Retained earnings	664,000	580,000
Total common equity	$3,664,000	$2,580,000
Total liabilities and equity	$9,064,000	$7,870,000

Lowell has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2017. As of the end of 2018, none of the principal on this debt had been repaid. Assume that the company's sales in 2017 and 2018 were the same. Which of the following statements must be CORRECT?

		Lowell increased its short-term bank debt in 2018.
		Lowell issued long-term debt in 2018.
		Lowell issued new common stock in 2018.
		Lowell repurchased some common stock in 2018.
		Lowell had negative net income in 2018.

Answer 1

1). There is no short term debt taken by the company from bank as per the bank. If notes payable represents debt to bank, it has declined from previous year. Therefore, the statement is incorrect.

2). Long term debt as on 2017 & 2018 remained same which means there is no long term debt being raised during 2018. Therefore the statement is incorrect.

3). The common stock value has increased through the year, which represents issue of new stock in 2018. Therefore, the statement is correct.

4). Had the company repurchased the stock, there would have been decline in common equity value in 2018 & also decline in the reserves, which in reality hasn’t happened. Therefore, the statement is incorrect.

5). If the company had negative net income, there would be a decline in reserves. But in fact, the reserves have increased, which represents positive net income. Therefore, the statement is incorrect.