Question

Thrillville has $39.5 million in bonds payable. One of the contractual agreements in the bond is that the debt to equity ratio cannot exceed 2.0.Thrillville’s total assets are $80.7 million, and its liabilities other than the bonds payable are $10.7 million. The company is considering some additional financing through leasing.
Required:
1. Calculate total stockholders' equity using the balance sheet equation. (Enter your answer in millions rounded to 1 decimal place. (i.e., $5,500,000 should be entered as 5.5).)
2. Calculate the debt to equity ratio. (Enter your answer in millions. (i.e., $5,500,000 should be entered as 5.5). Round ratio answer to 2 decimal places.)
3. The company enters a lease agreement requiring lease payments with a present value of $15.7 million. Record the lease. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Enter your answer in millions (i.e., $5,500,000 should be entered as 5.5.).)

Answer 1

Answer:

1. Stockholders' equity = $30.5 million;

2. Debt-to-equity ratio = 1.65

3. See explanation

Explanation:

1. Stockholders' equity calculation:

We know, according to the balance sheet equation,

Total Assets = Total liabilities + Stockholders' equity

Given,

Total Assets = $80.7 million

Total liabilities = Current liabilities + long-term liabilities

Total liabilities = $10.7 million + $39.5 million

Total liabilities = $50.2 million.

Therefore, total stockholders' equity = Total assets - Total liabilities

Total stockholders' equity = $80.7 million - $50.2 million

Total stockholders' equity = $30.5 million.

2. We know,

Debt-to-equity ratio = $\frac{Total debt}{Total stockholders' equity}$

When a company seeks to measure its financial leverage, that company uses debt-to-equity ratio. It also suggests that how much capital contributed by the creditors.

From requirement 1, we get,

Total liabilities = $50.2 million.

Total stockholders' equity = $30.5 million.

Therefore, Debt-to-equity ratio = $\frac{50.2}{30.5}$

Debt-to-equity ratio = 1.65

3. The journal entry to record the lease agreement -

Debit   Lease account         $15.7 million

Credit  Lease liability                         $15.7 million

(when the company enters into the lease agreement)