MST Corp, Statement showing Current Liabilities and Long term Liabilities as at 31 Dec 2002:

Current Liabilities:

Accounts Payable                                          65600 

Accrued Liabilities                                          11347

6% Bonds Payable                                        100000

8% Bonds Payable (250000-260)                    249740

Interest Payable (7333+2300)                        9633

Notes Payable                                               110000

Income tax payable                                       17300

Operating lease                                             7479

Current section of Capital Lease                       4621

Post retirement benefits                                  18000

                                                                          593720

Long-term Liability:

Deferred taxation                                          130000

Capital lease (23600-4621)                            18979

Retirement benefits (72000-18000)                 54000

11% Bonds Payable                                       301700

                                                                           504679

b) The issue of 6% Bonds Payable will be refinanced through the issue of further 150000 bonds payable at the rate of 9% which means that interest payment would increase to 13500 (150000*9%) compared to 6000 (100000*6%). This would not only reduce the profit but also increase the debt to equity ratio. On the other hand the repayment of 8% bond payable will reduce the interest paid by 20000 (250000*8%) thereby increasing the profits of the company.

Lease payments pertaining to operating lease will reduce the profits as they would be expensed out along with the distribution of 2300 as the interest expense. 4621 would be deducted from the amount capitalized for the asset. The pension plans would have no affect on the financial statements as they would not be considered as an obligation of the company because it is funded by independent trustees which means they have the obligation and not MST Corp. In the post retirement benefit 18000 will be treated as current liability and the rest i.e. 54000 (72000-18000) would be recorded under non-current liabilities. Income tax payable will be included in the income tax expense following the accruals and matching principle which would lead to reduction of profits whilst deferred taxation will only be included in long term liabilities.   

EQUITY:

1. Statement showing the Equity section of ABC Corp as at December 2003:

Ordinary Share Capital (170000*1)                 170000

Ordinary Share Premium (170000*14)            2380000

Preference Share Capital (10000*100)            1000000

Retained Earnings (refer appendix below)        195000

                                3745000

APPENDIX: 1

Cumulative Profit for four years =                         1025000

Preference Share Dividend (10000*100*8%*4) =   (320000)

Ordinary Share Dividend (0.75*170000*4) =          (510000)

                                                                                          195000

2. There are no preference shares dividends outstanding at the end of 2003 because all the dividend s including the ordinary share dividends were deducted to arrive at the figure of retained profit as shown in the part 1 above in appendix: 1.

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