Company Baldwin invested $58,760,000 in plant and equipment last year. The plant

Question

Company Baldwin invested $58,760,000 in plant and equipment last year. The plant investment was funded with bonds at a face value of $37,378,448 at 13.6% interest, and equity of $21,381,552. Depreciation is 15 years straight line. For this transaction alone which of the following statements are true?Select: 5

Cash went up when the Bond was issued by $37,378,448. Cash went down by $58,760,000 when the plant was purchased. On the Balance sheet, Long Term Debt changed by $37,378,448. Since the new plant was funded with debt and equity, on the Balance sheet Retained Earnings decreased by $21,381,552, the difference between the investment $58,760,000 and the bond $37,378,448. Cash was pulled from retained earnings to cover the $21,381,552 difference between the plant purchase and bond issue. On the Balance sheet, Plant & Equipment increased by $58,760,000. Buying the plant had no net effect on the Cash account, because the plant was paid for by the bond plus retained earnings. Depreciation increased by $3,917,333.

Explanation / Answer

the following 5 statements are true:

1.Cash went up when bond was issued by $37,378,448. This is because cash is received when bonds are sold. 2.Cash went down by $58,760,000 when the plant was purchased. This is because purchase of plant and equipment results in cash outflow 3.on balance sheet long term debt changed by $37,378,448 Bonds are a longterm debt and they increase by $37,378,448 4 Since the new plant was funded with debt and equity, retained earnings decreased by $21,381,552 Equity funding reduces the retained earnings 8.Depreciation increased by $3,917,333. $58,760,000 / 15 years=>$3,917,333

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