Question

Introduction to Financial Management Homework 2 Problem 02-A (5 points) The following table presents the long-term liabilities and stockholders' equity of Information Control Corp. one year ago: During the past year, the company issued 5 million shares of new stock at a total price of $63 million, and issued $30 million in new long-term debt. The company generated $8 million in net income and paid $1.8 million in dividends. Construct the current balance sheet reflecting the changes that occurred at the company during the year. (Just show the Liability & Equity side) Long-term debt Preferred stock Common stock ($1 par value) Accumulated retained earnings Capital surplus $55.000.000 3,100,000 12.000.000 119,000,000 56,000,000 Problem 02-B (15 points) Consider the following abbreviated financial statements for Weston Enterprises: a. What is owners' equity for 2014 and 2015? b. What is the change in net working capital for 2015? c. In 2015, Weston Enterprises purchased $2,350 in new fixed assets. How much in fixed assets did Weston Enterprises sell? What is the cash flow from assets for the year? (The tax rate is 40 percent.) d. During 2015, Weston Enterprises raised $455 in new long-term debt. How much long-term debt must Weston Enterprises have paid off during the year? What is the cash flow to creditors ? Weston Enterprises 2015 and 2014 Partial Balance Sheets Assets Liabilities and Owners' Equity 2015 2014 2015 Current assets $1,176 $984 Current liabilities $445 Net fixed assets 5.104 4.384 Long-term debt 2.713 2014 $401 2.380

Answer 1

Problem - 2A:

The following is the current Liability side of the Balance sheet after making the adjustments which happened during the current year.

Liability	Amount ($)
Long Term Debt	85,000,000
Preferred Stock	3,100,000
Common Stock ($1 Par Value )	17,000,000
Accumulated Retained Earrings	125,200,000
Capital Surplus	114,000,000

Calculation and Explanation:

1. Long term debt at the beginning of the year was $55,000,000 and during the year the company has issued $30,000,000 new long term debt. so the Long term debt at the end of the year is $85,000,000 (55,000,000 + 30,000,000).
2. Preferred stock remains as $3,100,000 because there is no change in this item during the year.
3. Common Stock is usually shown in the Balance sheet at their Par Value. The Common stock at the beginning of the year is $12,000,000 ( at Par value of $1 per stock). During the year the company has issued 5 million new stock for 63 million. Though the company has raised $63 million in issue of new stock the Par value of the new stock is 5 million because the par value of company stock is $1 per stock. So the Common stock at the end of the year is $17,000,000 (existing 12,000,000 + new 5,000,000 )
4. Accumulated Retained Earrings are the accumulated profits earned by the company after distributing dividends and other payments to the investors.  
   • Retained Earnings at the End = Beginning retained Earnings + ( Profit earned during the year - dividends paid)
   • Retained Earnings at the End = 119,000,000 + (8,000,000 - 1,800,000)

= 119,000,000 + 6,200,000

= $ 125,200,000

Retained Earnings at the beginning was $119,000,000. During the year the company has earned a net income of $8,000,000 out of this the company has declared dividend of $1,800,000. Applying the above formula the Retained earnings at the end of the year is $125,200,000

5. Capital surplus is the the amount of equity which cannot be classified as Capital stock or retained earnings. In simple terms those are the premium earned on issue of capital stock. The Capital surplus at the beginning was $56,000,000. During the year the company has issued 5 million new stock for 63 million and the Par value is $1. We have already discussed it in Common stock. The excess amount earned by the company over Par value is capital surplus.

Here New Capital Surplus = 63,000,000 - 5,000 000 = $ 58,000,000

Which makes the ending capital surplus = $ 114,000,000 ( $56,000,000 + $58,000,000).