Question

Glen’s Tobacco Shop has total assets of $100.0 million. Fifty percent of these assets are financed with debt of which $30.9 million is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $29.4 million.

What is the balance for long-term debt and retained earnings on Glen’s Tobacco Shop’s balance sheet? (Enter your answers in millions of dollars rounded to 1 decimal place.)

Answer 1

Basic Accounting equation says

Total Asset = Total Liabilities + Equity

Calculation of long term debt:

Given Total Assets = $100 million

50% of which is financed with Debt, thus total liability component = $50 million

Total Liability = Long term debt + current liability

$ 50 million = long term debt + $ 30.9 million

Thus Long term debt = $19.1 million

Now, let us calculate retained earnings:

As total liability was $50 million, so remaining $50 million is equity capital:

Equity Capital = paid in common stock + Reserve and surplus (Retained Earnings)

$50 million = $29.4 million + Retained earnings

Thus Retained earnings = $ 20.6 million.