I don’t understand, how is the franchise capitalized, and amortized, but the franchise is not counted as debt. Does anyone know why is the franchise not counted as debt (which would presumably add $10m $2m amortization)?
Selected information from Yorktown Corp.’s financial statements for the year ended December 31, 2004 was as follows (in $ millions):
Accounts Payable
8
Longterm Debt
9
Common Stock
17
Retained Earnings
23
Total Liabilities & Equity
57
In 2004, Yorktown paid $10 million cash to purchase a franchise. The franchise cost was fully expensed in 2004. If the company had elected to amortize the franchise cost over 5 years instead of expensing it, Yorktown’s total debt ratio (total debttototal capital) would:
A) increase from 0.474 to 0.551.
B) decrease from 0.298 to 0.262.
C) decrease from 0.474 to 0.403.
Your answer: C was incorrect. The correct answer was B) decrease from 0.298 to 0.262.
Total capital equals total assets which must equal total liabilities and equity. Yorktown’s total debt ratio was (($8 + $9) / $57 =) 0.298. If the franchise cost were amortized, retained earnings would be increased $8 million ($10 cost less ($10 / 5 =) $2 million of amortization.) The total debt ratio would change to (($8 + $9) / ($57 + $8) =) 0.262.作者: sabre 时间: 2013-4-7 09:37
Franchise is an asset.作者: SeanWest 时间: 2013-4-7 09:39
In addition only B) makes sense by elimination in the first place the ratio was 0.298.作者: sabaruch 时间: 2013-4-7 09:41
lzen5 capitalize is to add something to your assets like interest. making a prepaid expense is a deferred expense and does not involve capitalization since capitalization is usually for long term assets
