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At year-end 2015, Wallace Landscaping’s total assets were $1.9 million and its a

ID: 2612553 • Letter: A

Question

At year-end 2015, Wallace Landscaping’s total assets were $1.9 million and its accounts payable were $440,000. Sales, which in 2015 were $2.7 million, are expected to increase by 30% in 2016. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $400,000 in 2015, and retained earnings were $230,000. Wallace has arranged to sell $140,000 of new common stock in 2016 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2016. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 3%, and 45% of earnings will be paid out as dividends.

How much new long-term debt financing will be needed in 2016? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar. Do not round intermediate calculations.

Explanation / Answer

Wallace Total LOng term Debt in 2015

Assets

Amount($)

Liabilities

Amount($)

Total Assets

1900000

Accounts Payable

440000

Long Term Debt

830000

Common Stock

400000

Retained Earnings

230000

Long Term Debt = Total Assets - (Accounts Payable + Common Stock+ Retained Earnings)

Long Term Debt = 1900000-(440000+400000+230000) = $830000

Wallace Total Long Term debt in 2015 = $830000

Wallace Total Liabilities in 2015 = 440000+830000 = $1270000

2016

Assets

Amout($)

Liabilities

Amount($)

Total Assets(Proportional to increase in 30% of sales

2470000

Accounts Payable

429000

long term Debt

1440600

Common Stock (400000-140000)

260000

Retained Earnings (BRE+Profit-Dividend)

340400

Total Assets

2470000

Total Liabilities

2470000

Ending Retained Earnings = BEg Retained Earnings+Profit -Dividend

Ending RE =230000+(3% of230000)-(45% of 230000) =$340400

Long term Debt = Total Assets-(AccountsPAyable +Common Stock +Retained Earnings)

Long Term Debt in 2016 = $1440600

Assets

Amount($)

Liabilities

Amount($)

Total Assets

1900000

Accounts Payable

440000

Long Term Debt

830000

Common Stock

400000

Retained Earnings

230000