P9-8 4 B (L earn i ng Obj ec tiv es 4 , 5: R e p or t l i a bi l iti es on t he b alance shee t; cal
P9-84B (Learning Objectives 4, 5: Report liabilities on the balance sheet; calculate the leverage ratio, debt ratio, and times-interest-earned ratio) The accounting records of Braintree Foods, Inc., include the following items at December 31, 2012:
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Mortgage note payable,
Total assets …………………….
$4,200,000
current portion……………………
$ 97,000
Accumulated depreciation,
Accumulated pension
equipment …………………..
162,000
benefit obligation ………………..
470,000
Discount on bonds payable
Bonds payable, long-term…………
1,680,000
(all long-term) ……………..
22,000
Mortgage note payable,
Operating income…………….
390,000
long-term …………………………..
314,000
Equipment………………………
745,000
Bonds payable, current portion …
420,000
Pension plan assets
Interest expense………………………
227,000
(market value) ……………..
425,000
Interest payable ……………….
74,000
▶ Requirements
1. Show how each relevant item would be reported on the Braintree Foods, Inc., classified balance sheet, including headings and totals for current liabilities and long-term liabilities.
2. Answer the following questions about Braintree’s financial position at December 31, 2012:
a. What is the carrying amount of the bonds payable (combine the current and long-term
amounts)?
b. Why is the interest-payable amount so much less than the amount of interest expense?
3. How many times did Braintree cover its interest expense during 2012?
4. Assume that all of the existing liabilities are included in the information provided. Calculate the leverage ratio and debt ratio of the company. Evaluate the health of the company from a leverage point of view. What other information would be helpful in making your evaluation?
5. Independent of your answer to (4), assume that Footnote 8 of the financial statements includes commitments for operating leases over the next 15 years in the amount of
$3,000,000. If the company had to capitalize these leases in 2012, how would it change the leverage ratio and the debt ratio? How would this change impact your assessment of the company’s health from a leverage point of view?
