At year-end 2018, Marvel Company total assets were $4.5 million, and its accounts payable were $850,000. Sales, which in 2018 were $5.5 million, are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Marvel typically uses no current liabilities other than accounts payable. Common stock amounted to $ 2.25 million in 2018, and retained earnings were $150,000. Marvel has arranged to sell $25,000 of new common stock in 2019 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2019. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 2.5%, and 55% of earnings will be paid out as dividends. Required:
a. What were Marvel's total long-term debt and total liabilities in 2018?
b. How much new long-term debt financing will be needed in 2019?

Marvel Company

a. Marvel's total long-term debt in 2018 = $1,250,000

a2. Marvel's total liabilities = $2,100,000 ($850,000 +$1,250,000)

b. New long-term debt financing needed in 2019 = $810,156

Explanation:

a) Data and Calculations:

Year-end 2018:

Total assets = $4.5 million

Accounts payable $850,000

Sales = $5.5 million

Common Stock = $2.25 million

Retained Earnings = $150,000

Long-term debt = Total assets Minus (Accounts payable + Equity)

= $4,500,000 - ($850,000 + 2,250,000 + 150,000)

= $1,250,000

Year 2019:

Sales = $6,875,000 ($5.5 million * 1.25)

Net profit margin on sales = $171,875 (2.5% * $6,875,000)

Dividends = 55% of earnings = $94,531 (55% * $171,875)

Retained earnings for the year =  $77,344

Retained earnings for 2018:         150,000

Retained earnings, 2019:           $227,344

Common Stock = $2,275,000 ($2,250,000 + $25,000)

Total equity = $2,502,344 ($2,250,000 + 227,344)

Total assets = $5,625,000 ($4.5 million * 1.25)

Accounts payable = $1,062,500 ($850,000 * 1.25)

Long-term debt = Total Assets - (Total equity + Accounts Payable)

= $5,625,000 - ($2,502,344 + 1,062,500)

= $2,060,156

Increase in long-term debt = $810,156 ($2,060,156 - $1,250,000)

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