Question

Wolf Den Craft Beers projects that it will need​ $50 million in total assets to meet the sales projection of​ $65 million. The pro forma balance sheet shows accounts​ payable, $8​ million, accrued​ expenses, $2​ million, longminusterm ​debt, $10 million and​ equity, $25 million. If Wolf Den decides to meet discretionary financing needs with 5 year notes​ payable, how much will it need to​ borrow?

Answer 1

$5 million

Step-by-step explanation:

As we know the asset is financed from two capital sources equity and liability.

Using Accounting equations as follow

Assets = Equity + Liabilities

Total Assets Value = Equity Value + ( Account Payable + Accrued expenses + Long-Term Debt )

As we both sides are not equal, asset are more that the sum of equity and liabilities so we need more borrowing to finance the assets.

$50 million = $25 millions + ( $8 million + $2 million + $10 million ) + Additional Borrowing

$50 million = $25 millions + $20 million + Additional Borrowing

$50 million = $45 millions + Additional Borrowing

Additional Borrowing = $50 million - $45 millions

Additional Borrowing = $5 million