Hair Etc. has total assets of $15 million. Twenty percent of these assets are financed with debt of which $1 million is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $8 million. Using this information what is the balance for long-term debt and retained earnings on Hair Etc.'s balance sheet?
A) $1 million, $8 million
B) $2 million, $4 million
C) $2 million, $8 million
D) $3 million, $4 million

Question

Quizplus · Accepted Answer

DTotal assets = $15 million. 20% financed by debt = 0.20 * $15 million = $3 million total debt. Subtract $1 million current liabilities to find long-term debt = $3 million - $1 million = $2 million. Equity = Total assets - Total debt = $15 million - $3 million = $12 million. Subtract common stock and paid-in surplus ($8 million) from equity to find retained earnings = $12 million - $8 million = $4 million.

Hair Etc Has Total Assets of $15 Million