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Company Baldwin invested $37,940,000 in plant and equipment last year. The plant investment was funded with bonds at a face value of $28,448,423 at 13.9% interest, and equity of $9,491,577. Depreciation is 15 years straight line. For this transaction alone, which of the following statements are true?

A. On the Balance Sheet, Plant & Equipment increased by $37,940,000.
B. On the Balance Sheet, Long Term Debt changed by $28,448,423.
C. Since the new plant was funded with debt and equity, on the Balance Sheet Retained Earnings decreased by $9,491,577, the difference between the investment $37,940,000 and the bond $28,448,423.
D. Depreciation increased by $2,529,333.

Answer :

True statements for the described transaction are that the Plant & Equipment account would increase by $37,940,000, Long Term Debt would change by $28,448,423, and Depreciation would increase by $2,529,333 per year. Retained Earnings would not be directly reduced by the equity portion of the investment.

For the given situation, where Company Baldwin invested $37,940,000 in plant and equipment, and funding was secured through a combination of bonds and equity, the following statements can be evaluated:

  • A: On the Balance sheet, Plant & Equipment increased by $37,940,000.
  • B: On the Balance sheet, Long Term Debt changed by $28,448,423.
  • C: Since the new plant was funded with debt and equity, on the Balance sheet Retained Earnings would not necessarily decrease by $9,491,577. The equity part of the investment increases owner's equity accounts, which may include common stock or additional paid-in capital, not retained earnings directly.
  • D: Using straight-line depreciation with a lifespan of 15 years, depreciation increased by $2,529,333 per year ($37,940,000 / 15 years).

Therefore, the true statements are A, B, and D. The explanation for C is incorrect because an equity investment does not reduce retained earnings directly.

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