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At year-end 2016, Wallace Landscaping's total assets were $1.8 million and its accounts payable...

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At year-end 2016, Wallace Landscaping's total assets were $1.8 million and its accounts payable were $370,000. Sales, which in 2016 were $2.2 million, are expected to increase by 25% in 2017. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $460,000 in 2016, and retained earnings were $300,000. Wallace has arranged to sell $170,000 of new common stock in 2017 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2017. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 3%, and 60% of earnings will be paid out as dividends.

a. What was Wallace's total long-term debt in 2016?

b. What were Wallace's total liabilities in 2016?

C. How much new long-term debt financing will be needed in 2017?

Long-term liabilities:

Liabilities are the items owed by the company to its creditors. It may be long-term (non-current) or short-term (current), depending on its maturity date. When such liability will be settled one (1) year after the reporting period or less, it will be considered as current, otherwise, non-current.

Answer and Explanation:

a. What was Wallace's total long-term debt in 2016?

Total Assets 1,800
Accounts Payable -370000
Common Stock -460,000
Retained Earnings -300,000
Long-term Liabilities 670,000

b. What were Wallace's total liabilities in 2016?

Accounts Payable 370,000
Long-term Liabilities 670,000
Total Liabilities 1,040,000

C. How much new long-term debt financing will be needed in 2017?

Considering the proportion of sales to cash and accounts payable, the new total assets and accounts payable balance will be computed as follows:

2016 Total Assets 1,800,000
Divided by 2016 Sales 2,200,000
Ratio 81.82%


2016 Accounts Payable 370,000
Divided by 2016 Sales 2,200,000
Ratio 16.82%


2016 Sales 2,200,000
Increase in Sales 25%
Increase in Sales 550,000
2017 Sales 2,750,000


2017 Sales 2,750,000
Ratio to Total Assets 81.82%
2017 Total Assets 2,250,000


2017 Sales 2,750,000
Ratio to Accounts Payable 16.82%
2017 Accounts Payable 462,500


Total Assets 2,250,000
Sale of Common Stock 170,000
Financing for the Long Term Debt -170,000
Total Assets 2,250,000
Accounts Payable -462,500
Common Stock (460,000 + 170,000) 630,000
Retained Earnings 300,000
Long-term Debt (670,000-170,000 500,000
New Long-term Debt 357,500

Learn more about this topic:

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Current & Long-Term Liabilities: Definition & Characteristics

from Accounting 101: Financial Accounting

Chapter 10 / Lesson 1
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