Long-term debt is an obligation for the issuer to pay back, but it is an asset for the holders of the debt (such as bond holders).
Global paid down its long-term debt using $ 21 million of its available funds.
<h3>What is meant by
long-term debt?</h3>
Debt with a maturity date of more than a year is referred to as long-term debt and is frequently handled differently than short-term debt. Long-term debt is an obligation for the issuer to pay back, but it is an asset for the holders of the debt (such as bond holders).
a. Global paid down its long-term debt using $ 21 million of its available funds.
As a result, the amount of cash and long-term debt is decreased and the responsibility is paid in cash.
There was a $21 million reduction in both assets and liabilities but no change in the book value of equity.
b. Uninsured inventory worth $5 million was destroyed by a warehouse fire.
This will result in a $5 million fall in inventory, which is an asset, and a $5 million decrease in the book value of equity as a result of the loss.
c. Global paid $ 10 million for a building using $ 4 million in cash and $ 6 million in new long-term debt.
This will result in a $4 million loss in cash, an asset, a $10 million increase in building assets, and a $6 million increase in long-term debt, a liability.
The equity book value won't be affected.
d. Global had no chance of ever receiving the $ 2 million it owed for goods it had previously received due to a significant customer's insolvency.
As a result, the book value of equity will decline by $2 million and the balance of accounts receivables will decrease by the same amount.
e. The engineers at Global find a new manufacturing method that will reduce the price of its main product by more than 55%.
This won't have any effect on the balance sheet because it will only have an effect on the upcoming income statement and the book value of equity.
f. A significant rival makes a bold new pricing announcement that will significantly undercut Global's rates.
Because this will only have an effect on the income statement that will be created after such a change in price, it will not have any effect whatsoever on the current balance sheet or the book value.
The complete question is:
Consider the following potential events that might have occurred to Global Conglomerate on December 30, 2015. For each one, indicate which line items in Global's balance sheet would be affected and by how much. Also indicate the change to Global's book value of equity. (In all cases, ignore any tax consequences for simplicity.) a. Global used $ 21 million of its available cash to repay $ 21 million of its long-term debt. b. A warehouse fire destroyed $ 5 million worth of uninsured inventory. c. Global used $ 4 million in cash and $ 6 million in new long-term debt to purchase a $ 10 million building. d. A large customer owing $ 2 million for products it already received declared bankruptcy, leaving no possibility that Global would ever receive payment. e. Global's engineers discover a new manufacturing process that will cut the cost of its flagship product by over 55 %. f. A key competitor announces a radically new pricing policy that will drastically undercut Global's prices.
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