Question

The following information is taken from the 2020 annual report of Wildhorse, Inc. Wildhorse’s fiscal year ends December 31 of each year. Wildhorse’s December 31, 2020, balance sheet is as follows. Wildhorse, Inc. Balance Sheet December 31, 2020 Assets Cash $420 Inventory 1,770      Total current assets 2,190 Plant and equipment 1,800      Accumulated depreciation (144)        Total assets 3,846 Liabilities Bonds payable (net of discount) $1,426 Stockholders’ equity Common stock 1,500 Retained earnings 920        Total liabilities and stockholders’ equity $3,846 Note X: Long Term Debt: On January 1, 2019, Wildhorse 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. Additional information concerning 2021 is as follows. 1. Sales were $3,400, all for cash. 2. Purchases were $2,000, all paid in cash. 3. Salaries were $640, all paid in cash. 4. Property, plant, and equipment was originally purchased for $1,800 and is depreciated straight-line over a 25-year life with no salvage value. 5. Ending inventory was $1,900. 6. Cash dividends of $110 were declared and paid by Wildhorse. 7. Ignore taxes. 8. The market rate of interest on bonds of similar risk was 12% during all of 2021. 9. Interest on the bonds is paid semiannually each June 30 and December 31.

Prepare an income statement for the year ending December 31, 2021. Assume semiannual compounding of the bond interest. Prepare a balance sheet for Wildhorse, Inc. at December 31, 2021. Assume semiannual compounding of the bond interest. Compute debt to assets ratio and times interest earned ratio for 2020 and 2021. Wildhorse’s net income in 2020 was $590 and interest expense was $169.

Answer 1

3,400 1,870 1,530 Wildhorse, Inc. Income Statement For the Year Ending December 31, 2021 Sales Cost of goods sold Gross profit Operating Expenses Salaries expense Depreciation expense Total Operating expenses Operating Income Interest expense Net Income 640 712 818 172 646 Statement of Retained Earnings For the Year Ending December 31, 2021 Beginning balance Net Income Less Dividends Ending Balance 920 646 (110) 1,456

Wildhorse, Inc. Balance Sheet As of December 31, 2021 Assets Current Assets Cash Inventory Total Current Assets 920 1,900 2,820 1,800 Property, Plant & Equipment Plant and Equipment Accumulated Depreciation Total Property, Plant & Equipment Total Assets (216) 1,584 4,404 Liabilities & Stockholders Equity Liabilties Bonds Payable (net of discount) 1,448 Stockholders Equity Common Stock Retained earnings Total Stockholders Equity Total Liabilities & Stockholders Equity 1,500 1,456 2,956 4,404

Wildhorse, Inc. 2020 37.08% 4.49 Calculation 2021 2020 2021 Formula 32.87% =1,426/3,846 =1,448/4,404 Total Debt / Total Assets 4.76 =(590+169)/169 =818/172 Earnings before interest and taxes (EBIT) / Interest expense Debt to assets ratio Times interest earned ratio

+ Wildhorse, Inc. Assets Liabilties + Equity Account Titles for Events Cash Inventory Plant & Equip Accumulated Dep = Bonds Payable + Common Stock + Retained Earnings Retained Earnings Calculation Beg Bal $ 420 $ 1,770 $ 1,800 $ (144) = $ 1,426 + $ 1,500 + $ 920 1 $ 3,400 + $ 3,400 Sales $ (2,000) $ 2,000 3 $ (640) (640) Salaries expense (72) (72) Depreciation expense =1,800/25 $ (1,870) (1,870) Cost of goods sold =1,900-1,770-2,000 $ (110) + $ (110) Dividends + + + + + + + + cown + + + 9 End Bal $ $ (150) 920 $1,900 $ 1,800 $ = $ (216) = $ 1,448 + $ + S 1,500 + $ (172) Interest expense 1,456 From bond table:- =75+75 = 150 =86+86 = 172 =11+11=22

Wildhorse, Inc. Schedule of Bond discount Amortization Calculation Carrying Amount Interest Payment Date Interest Payment Interest expense Amortization Carrying Amount Interest expense Amortization 12% 10% =1,500*10%*6/12 =1,500*10%*6/12 =1,390*12%*6/12 -1,398*12%*6/12 =83-75 =84-75 =1,390+8 =1,398+9 1-Jan-19 30-Jun-19 31-Dec-19 30-Jun-20 31-Dec-20 30-Jun-21 31-Dec-21 30-Jun-22 31-Dec-22 30-Jun-23 31-Dec-23 1,500 * 10% *6/12 1,390 1,398 1,407 1,416 1,426 1,437 1,448 1,460 1,472 1,486 1,500 Face amt*10%*6/12 Carrying amt* 12%*6/12 Int exp less int pmt Carrying amt plus Amort Amount Present Value (PV) PV of Interest PV of Maturity Total PV Future Value Bond Discount Calculation 552 =75*(1-(1/(1+6%)^10))/6% 838 =1,500/(1+6%)^10 1,390 Initial Carrying Amount (1,500) (110) Interest rate - annual Interest rate-semi annual 12% 6% Number of years Number of periods