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Balance Sheet Effects

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Two companies, Energen and Hastings Corporation, began operations with identical balance sheets. A year later, both required additonal manufacturnig capacity at cost of $50,000. Energen obtained a 5-year, $50,000 loan at an 8 percent interest rate from its bank. Hastings, on the otherhand, decided to lease the required $50,000 capacity for 5 years, and an 8 percent return was built into the lease.
The balance sheet for each company, before the asset increases, follows:

(see attached)

a) Show the balance sheets for both firms after the asset increases and calculate each firm's new debt ratio.
(Assume that the lease is not capitalized.)
b) Show how Hastings's balance sheet would look immediately after the financing if it capitalized the lease.
c) Would the rate of return (1) on assets and (2) on equity be affected by the choice of financing? How?

Text answers:

a) Energen: Debt/TA = 50%
Hastings: Debt/TA = 33%

b) TA = $200

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Solution Summary

Excel file contains ratios and balance sheets for both the firms after assets increases and after capitalization of lease.

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Adjustments to income statement and balance sheet

Attached is the example Income Statement and Balance Sheet for the problem....

Make corrections and adjustments to income statement and balance sheet. Big Blue Rental Corp. provides rental agent services to apartment building owners. Big Blue Rental Corp.'s preliminary income statement for August, 2009, and its August 31, 2009, preliminary balance sheet did not reflect the following:

a. Rental commissions of $1,000 had been earned in August but had not yet been received from or billed to building owners.
b. When supplies are purchased, their cost is recorded as an asset. As supplies are used, a record of those used is kept. The record sheet shows that $720 of supplies were used in August.

c. Interest on the note payable is to be paid on May 31 and November 30. Interest for August has not been accrued--that is, it has not yet been recorded. (The Interest Payable of $160 on the balance sheet is the amount of accrued liability at July 31.) The interest rate on the note is 10%.

d. Wages of $520 for the last week of August have not been recorded.

e. The Rent Expense of $2,040 represents rent for August, September, and October, which was paid in early August.

f. Interest of $560 had been earned on notes receivable but has not yet been received.

g. Late in August, the board of directors met and declared a cash dividend of $5,600, payable September 10. Once declared, the dividend is a liability of the corporation until it is paid.

Required:

a. Using the columns provided on the income statement and balance sheet for Big Blue Rental Corp., make the appropriate adjustments/corrections to the statements, and enter the correct amount in the Final column. Key your adjustments /corrections with the letter of the item in the preceding list. Captions/account names that you will have to use are on the statements.

b. Consider the entries that you have recorded in your answer to part a. Using these items as examples; explain why adjusting entries normally have an effect on both the balance sheet and the income statement.

c. Explain why the Cash account on the balance sheet is not usually affected by adjustments. In your answer, identify the types of activities and/or events that normally cause the need for adjustments to be recorded. Give at least one example of an example of an adjustment (other than those provided in the problem data).

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