Your company has negotiated the purchase of some land, a building, equipment, an
ID: 2430120 • Letter: Y
Question
Your company has negotiated the purchase of some land, a building, equipment, and vehicles for $2,000,000. The appraised values of these assets is as follows: Land Building Equipment Vehicles total 1,000,000 550,000 630,000 120,000 2,300,000 There are two choices to finance the acquisition of these assets: one, would be to obtain an installment loan from City National Bank at 9.0% for 6 years (compounded annually). The other choice would be to issue non-cumulative, $125 par value, 10% preferred stock. Required: Compute the values of the acquired assets based on the appraised values and prepare the resulting journal entry (5 points). Compute the payment on the loan and prepare the repayment schedule (10 points) Prepare a written analysis of the two financing options (at least one page), discussing the advantages (5 points) and disadvantages (5 points) of each (for a total of 20 points). Finally, provide your recommendation (5 points), based on the advantages and disadvantages mentioned in your analysis. Be specific, and be sure to show all work.Explanation / Answer
Calculation of acquired value of each asset based on appraised value:
Assets
Appraised Value
Value of acquired assets
Building
550000
(550000/2300000) * 2000000 = 478261
Land
1000000
(1000000/2300000) *2000000 = 869565
Equipment
630000
(630000/2300000)*2000000 = 547826
Vehicles
120000
(120000/2300000)*2000000 = 104348
TOTAL
2300000
2000000
Journal entry if Preferred stocks are issued:
Land Dr 869565
Building Dr 478261
Equipment Dr 547826
Vehicles Dr 104348
10% Preferred Stock Cr 2000000
Journal entry if loan is taken from City National Bank:
Land Dr 869565
Building Dr 478261
Equipment Dr 547826
Vehicles Dr 104348
Long term loan Cr 2000000
Calculation of payment of loan each year:
Loan amount = 2000000
Interest rate = 9%
Loan term = 6 years
Per year payment of loan = 2000000/Present value annuity factor (9%,6) = 2000000/4.4859 = 445841.41
Repayment schedule of loan for 6 years:
Year
Opening
Balance (A)
Interest @ 9%
(A*9%) = B
Annual
Payment (C)
Closing
Balance (A+B-C)
1
2000000.00
180000.00
445841.41
1734158.59
2
1734158.59
156074.27
445841.41
1444391.45
3
1444391.45
129995.23
445841.41
1128545.27
4
1128545.27
101569.07
445841.41
784272.94
5
784272.94
70584.56
445841.41
409016.09
6
409016.09
36825.32
445841.41
0.00
Assets
Appraised Value
Value of acquired assets
Building
550000
(550000/2300000) * 2000000 = 478261
Land
1000000
(1000000/2300000) *2000000 = 869565
Equipment
630000
(630000/2300000)*2000000 = 547826
Vehicles
120000
(120000/2300000)*2000000 = 104348
TOTAL
2300000
2000000
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