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CengageNOW | Online ter west.cengagenow.com/ilrm/takeAssignment/takeAssignmentMain.do Problem 20 Balance sheet effects of leasing Two textile companies, McDaniel-Edwards Manufacturing and Jordan-Hocking Mills, began operations cost of $250,000. McDaniel Edwards obtained a 5-year, $250,000 loan at an 9% interest rate from its bank. from National Leasing for 5 years; an 9% return was buit nto the lease. The balance sheet rds Manufacturing and ordan Hoki g began operations with identical balance sheets. A year later, both required additi nal manufacturing (an city at required additional manufacturing capacity at interest rate from its bank. Jordan-Hecking, on the other hand, decidled to lease the required $250,000 capacity for each company, before the asset increases, is as follows Debt Equity Total liabilities and equity $200,000 200,000 $400,000 Total assets $400,000 Show the McDaniel-Edwards balance sheet after the asset increase. Round your answers to two decimal places. Debt 1. $ Equity 2. $ Total liabilitles and equity Total 3. $ 4.$ assets Calculate McDaniel-Edwards new debt ratio. Round your answer to two decimal places Show the 1crdan-Hocking's balance sheet after the asset increase. (Assume lease is kept off the balance sheet.) Round your answers to two decimal places. Debt Equity 7.3 Total8. Total Rabilties and equity

Explanation / Answer

Mc Daniels Balance Sheet after Asset increase

Debt equity ratio after asset increase = 450000/200000 = 2.25

In Jordan Hockings

Leased asset should be recorded at lower of the following

Fair value of leased assets 250000

P.V. of lease payments (22500 x 3.8897) 87519

Thus leased asset should be recorded at 87519

Balance sheet after asset increse will be as follows

Debt-Equity Ratio = 200000/200000 = 1

Assets Amount Liabilities Amount Assets 650000 Debt 450000 Equity 200000 Total Assets 650000 Total Liabilities aqnd equity 650000

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