What is the hardware store's capacity to support equity or debt financing? What mixture of debt and equity is appropriate to use? What are the likely sources?
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- A Neighborhood hardware store is planning to add an equipment rental service to its business. It needs $30,000 to $40,000 to buy the rental equipment and expects rental sales of $3,000 to $3,500 per month. It rents its building with ten years remaining on its lease and has had stable total sales over the past several years.
This exercise provides an example of how the aspects of equity and debt discussed in the lecture relate to a business situation. The following points should be covered.
- What is the hardware store's capacity to support equity or debt financing?
- What mixture of debt and equity is appropriate to use?
- What are the likely sources?
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- Aggressive Corporation approaches Matt Taylor, a loan officer for Oklahoma State Bank, seeking to increase the company's borrowings with the bank from $100,000 to $150,000. Matt has an uneasy feeling as he examines the loan application from Aggressive Corporation, which just completed its first year of operations. The application included the following financial statements. The income statement submitted with the application shows a net income of $30,000 in the first year of operations. Referring to the balance sheet, this net income represents a more-than-acceptable 15% rate of return on assets of $200,000. Matt's concern stems from his recollection that the $100,000 note payable reported on the balance sheet is a three-year loan from his bank, approved earlier this year. He recalls another promising new company that, just recently, defaulted on its loan due to its inability to generate sufficient cash flows to meet its loan obligations. Seeing Matt's hesitation, Larry Bling, the CEO…Aggressive Corporation approaches Matt Taylor, a loan officer for Oklahoma State Bank, seeking to increase the company’s borrowings with the bank from $100,000 to $150,000. Matt has an uneasy feeling as he examines the loan application from Aggressive Corporation, which just completed its first year of operations. The application included the following financial statements. The income statement submitted with the application shows net income of $30,000 in the first year of operations. Referring to the balance sheet, this net income represents a more-thanacceptable 15% rate of return on assets of $200,000. Matt’s concern stems from his recollection that the $100,000 note payable reported on the balance sheet is a three-year loan from his bank, approved earlier this year. He recalls another promising new company that, just recently, defaulted on its loan due to its inability to generate sufficient cash flows to meet its loan obligations. Seeing Matt’s hesitation, Larry Bling, the CEO…Grant Film Productions wishes to expand and has borrowed $100,000. As a condition for making this loan, the bank requires that the business maintain a current ratio of at least 1.50. Business has been good but not great. Expansion costs have brought the current ratio down to 1.40 on December 15. Rita Grant, owner of the business, is considering what might happen if she reports a current ratio of 1.40 to the bank. One course of action for Grant is to record in December $10,000 of revenue that the business will earn in January of next year. The contract for this job has been signed. Requirements Journalize the revenue transaction, and indicate how recording this revenue in December would affect the current ratio. Discuss whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation, and give the reasons underlying your conclusion.
- Thangmo Company is a large manufacturing firm in Cherating that was created 20 years agoby the Thangmo family. It was initially financed with an equity investment by the Thangmofamily and 10 other individuals.Over time, Thangmo Company obtained substantial loans from finance companies andcommercial banks. The interest rate on the loans is tied to market interest rates and is adjustedevery six months. It has a credit line with a bank in case it suddenly needs additional funds fora temporary period. It has purchased Treasury securities that it could sell if it experiences anyliquidity problems.Thangmo Company has assets valued at about RM50 million and generates sales of aboutRM100 million per year. Some of its growth is attributed to its acquisitions of other firms.Because of its expectations of a strong Malaysian economy, Thangmo plans to grow in thefuture by expanding its business and by making more acquisitions. It expects that it will needsubstantial long-term financing and plans to…Thangmo Company is a large manufacturing firm in Cherating that was created 20 years agoby the Thangmo family. It was initially financed with an equity investment by the Thangmofamily and 10 other individuals.Over time, Thangmo Company obtained substantial loans from finance companies andcommercial banks. The interest rate on the loans is tied to market interest rates and is adjustedevery six months. It has a credit line with a bank in case it suddenly needs additional funds fora temporary period. It has purchased Treasury securities that it could sell if it experiences anyliquidity problems.Thangmo Company has assets valued at about RM50 million and generates sales of aboutRM100 million per year. Some of its growth is attributed to its acquisitions of other firms.Because of its expectations of a strong Malaysian economy, Thangmo plans to grow in thefuture by expanding its business and by making more acquisitions. It expects that it will needsubstantial long-term financing and plans to…Bob Jacobs wishes to expand his business and has borrowed $100,000. As a condition for making this loan, the bank requires that the business maintain a current ratio of at least 1.50. Business has been good but not great. The expansion costs have brought the current ratio down to 1.20 in the middle of December. Bob, as the owner of the business, is considering what might happen if he reports a current ratio of 1.4 to the bank. One possible action for Bob is to record in December $10,000 of revenue that the business will earn in January of next year. He thinks this is doable because the contract for this job has been signed. Journalize the revenue transaction and indicate how recording this revenue in December would affect the current ratio. Discuss whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation. and give the reasons underlying your conclusion. Propose an ethical action for Bob Jacobs.
- The president of the retailer Prime Products has just approached the company’s bank with a request for a$30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. Becausethe company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cashbudget to help determine whether the loan should be made. The following data are available for the monthsApril through June, during which the loan will be used:a. On April 1, the start of the loan period, the cash balance will be $24,000. Accounts receivable onApril 1 will total $140,000, of which $120,000 will be collected during April and $16,000 will becollected during May. The remainder will be uncollectible.b. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in themonth following sale, and 8% in the second month following sale. The other 2% represents bad debtsthat are never collected. Budgeted sales and expenses for the…On August 1, Lola Company’s assets are $30,000 and its liabilities are $10,000. On August 4, Lola issues a sustainability report following SASB guidelines. Investors react positively to this report. On August 5, a new investor contributes $3,000 cash and $7,000 in equipment in exchange for Lola stock. After the investment, what is the amount of equity for Lola?Flo Choi owns a small business and manages its accounting. Her company just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment and fixture additions. Choi’s banker requires her to submit semiannual financial statements so he can monitor the financial health of her business. He has warned her that if profit margins erode, he might raise the interest rate on the borrowed funds to reflect the increased loan risk from the bank’s point of view. Choi knows profit margin is likely to decline this year. As she prepares year-end adjusting entries, she decides to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following quarter. (The previous rule assumed assets are in use on the first day of the month nearest to the purchase date.) Discuss the following: Identify decisions that managers like Choi must make in applying depreciation methods. Is Choi’s rule an…
- Flo Choi owns a small business and manages its accounting. Her company just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment and fixture additions. Choi’s banker requires her to submit semiannual financial statements so he can monitor the financial health of her business. He has warned her that if profit margins erode, he might raise the interest rate on the borrowed funds to reflect the increased loan risk from the bank’s point of view. Choi knows profit margin is likely to decline this year. As she prepares year-end adjusting entries, she decides to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following month. (The previous rule assumed assets are in use on the first day of the month nearest to the purchase date.) Required 1. Identify decisions that managers like Choi must make in applying depreciation methods. 2. Is Choi’s rule an ethical…The Pizza and Coffee Company is owned and operated by Patty Patterson who commenced the business eight years ago. The company is now faced with financial challenges and is therefore in need of financial assistance from Ready Cash a local bank. You and your group members are the accounting associates supporting the credit request to Ready Cash and they are requesting a full set of financial statements to ensure that granting the loan would be financially feasible. Your head of finance has furnished you with the latest trial balance for The Pizza and Coffee Company, along with other information relevant to the year under review and you are tasked to prepare the documents requested by Ready Cash. Below is the trial balance which was extracted from the books of the business on December 31, 2020, the end of the company’s financial year. As a group, you are required to collaborate and analyse the problem at hand then apply the accrual basis of accounting in the preparation of the company’s…The Pizza and Coffee Company is owned and operated by Patty Patterson who commenced the business eight years ago. The company is now faced with financial challenges and is therefore in need of financial assistance from Ready Cash a local bank. You and your group members are the accounting associates supporting the credit request to Ready Cash and they are requesting a full set of financial statements to ensure that granting the loan would be financially feasible. Your head of finance has furnished you with the latest trial balance for The Pizza and Coffee Company, along with other information relevant to the year under review and you are tasked to prepare the documents requested by Ready Cash. Below is the trial balance which was extracted from the books of the business on December 31, 2020, the end of the company’s financial year. As a group, you are required to collaborate and analyse the problem at hand then apply the accrual basis of accounting in the preparation of the company’s…
