Question

Accounting, Analysis, and Principles The following information is taken from the 2020 annual report of Bugant, Inc. Bugant's fiscal year ends December 31 of each year. Bugant's December 31, 2020, balance sheet is as follows. $ 450 1,800 2,250 2,000 Bugant, Inc. Balance Sheet December 31, 2020 Assets Cash Inventory Total current assets Plant and equipment Accumulated depreciation Total assets Liabilities Bonds payable (net of discount) Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity (160) $4,090 $1,426 1,500 1,164 $4,090 Note X: Long Term Debt: On January 1, 2019, Bugant issued bonds with face value of $1,500 and a coupon rate equal to 10%. The bonds were issued to yield 12% and mature on January 1, 2024.

Answer 1

Answer"

						BUGANT INC.
				INCOME STATEMENT FOR THE YEAR ENDING 31 DEC.,2021						US $
				PARTICULARS			AMOUNT	PARTICULARS		AMOUNT
				TO OPG STOCK		1800		BY SALES		3500
				ADD PURCHASE		2000	3800	BY CLOSING STOCK		1900
				TO SALARY			700
				TO DEPRECIATION			80
				TO INT. ON BOND			150
				(10% on 1500 Face Value)
				TO DIVIDEND			100
				TO PROFIT			570
							5400			5400
	CASH A/C
OPG BALA.		450
ADD SALE		3500				BALANCE SHEET AS AT 31 DEC., 2021
		3950		LIABILITIES			AMOUNT	ASSETS		AMOUNT
LESS PURCH		2000		BONDS PAYABLE			1426	CASH		1000
INTEREST		150		COMMON STOCK			1500	INVENTORY		1900
DIVIDEND		100		RETAINED EARNINGS				PLATN & EQUIP	2000
SALARY		700		(1164+570)			1734	LESS ACCU DEP	240	1760
	NET BAL	1000
							4660			4660

(2) Long Term Debt's assessment ratio for solvancy

DEBT EQUITY RATION

DEBT/EQUITY+RETAINED EARNING

2021

2020 year

0.44094

LESS THAN HALF ie .44/1 (approx)

0.535285

DEBT SERVICE COVERAGE RATIO

PROFIT BEFORE INT & DEP./INT. ON BONDS

5

TIMES

2021 yr

times

4.727811

DEBT TURNOVER RATION

TURNOVER/DEBTS

2.454418

TIMES

BASED ON AFORESAID, WE CAN REPORT THAT COMPANY IS IN GOOD FINANCIAL POSITION TO

REPAY ITS DEBTS AND CAN SERVE THE INTEREST UPTO 5 TIMES.

DEBTS ARE NEAR 50% OF ITS EQUITY & RETAINED EARNINGS WHICH IS HEALTHY SIGN.

If we compare with 2020 to 2021 , there is positive indicators of improvement in Debt Services coverage & Debt Equity ratios. However it is not extraordinary change but looking to company's size, its significant improvement.

Answer 3. If the company takes the decisions to show the long term debts at its fair value, still there will be no material differences as there will be slight change in Debt amount, if we show it at its fair value of 1500 being the face value, for which the company will be liable to pay at its maturity.