Question

Company Baldwin invested $51,960,000 in plant and equipment last year. The plant investment was funded with bonds at a face value of $34,355,973 at 13.6% interest, and equity of $17,604,027. Depreciation is 15 years straight line. For this transaction alone which of the following statements are true?

Select: 5

	a. Cash was pulled from retained earnings to cover the $17,604,027 difference between the plant purchase and bond issue.
	b. Depreciation increased by $3,464,000.
	c. Since the new plant was funded with debt and equity, on the Balance sheet Retained Earnings decreased by $17,604,027, the difference between the investment $51,960,000 and the bond $34,355,973.
	d. On the Balance sheet, Long Term Debt changed by $34,355,973.
	e. Cash went down by $51,960,000 when the plant was purchased.
	f. Buying the plant had no net effect on the Cash account, because the plant was paid for by the bond plus retained earnings.
	g. On the Balance sheet, Plant & Equipment increased by $51,960,000.
	h. Cash went up when the Bond was issued by $34,355,973.

Answer 1

Answer :The correct statements are:

b. Depreciation increased by $3,464,000.

Reason: As plant is purchased there will be increase in depreciation. $ 51,960,000 /15 = $ 3,464,000.

d. On the Balance sheet, Long Term Debt changed by $34,355,973.

Reason: For purchase of plant, bonds are issued worth $ 34,355,973. This will be shown in balance sheet as long term debt.

g. On the Balance sheet, Plant & Equipment increased by $51,960,000.

Reason: As plant is purchased , it will be shown on asset side of balance sheet under plant and equipment.

Note: Rest of the options are not correct as most of them involves cash and retained earnings. But cash and retained earnings are not a part of the given transaction, so will not have any change.