Accounting for Long-Term Debt n Forecast 1 is computed as the beginning balance of $365,000 plus 65,000, plus the S100,000 cash investment, plus net income of $58, 100, less the S$11.620 The balance for assets het income of $35,000. The balance for assets in Forecast 2 is computed as the beginning balan tondnd Alternatively, total assets can be computied by determining the amount of total celaims (total assets total claims). Harbert tells Watson that there would be a $3.486 tax a dvantage associated with debt financ- ing. She says that if Watson is willing to become a creditor instead of an owner, she could pay hinm an additional $697.20 (that is 20 percent of the tax advantage). Watson tells Harbert that he has no interest in participating in the management of the business, but Watson wants an ownership interest to guarantee that he will always receive 20 percent of the profits of the business Harbert suggests that they execute a formal agreement in which Watson is paid 11.62 percent interest on his $100,000 loan to the business This agreement will be used for income tax reporting. In addi- tion, Harbert says that she is willing to establish a private agreement to write Watson a personal check for any additional amount necessary to make Watson's total return equal to 20 percent of all profits plus a $697.20 bonus for his part of the tax advantage. She tells Watson, "It's just like ownership. The only difference is that we call it debt for the Internal Revenue Service. If they want to have some silly rule that says if you call it debt, you get a tax break, then we are foolish if we don't call it debt. I will call it anything they want, just as long as I don't have to pay taxes on it. Required a. Construct a third set of forecasted financial statements (Forecast 3) at 11.62 percent an b. Verify the tax advantage of debt financing by comparing the balances of the Retained Earn- c. If you were Watson, would you permit Harbert to classify the equity transaction as debt to d. Comment on the ethical implications of misnaming a financing activity for the sole purpose nual interest, assuming that Watson is treated as creditor (he loans the business $100,000). ings account in Forecast 2 and Forecast 3. provide a higher return to the business and to you? of reducing income taxes ATC 10-8 Research Assignment Analyzing long-term debt at Union Pacific Railroad Many companies have a form of debt called capital leases A capital lease is created when a com- pany agrees to rent an asset, such as equipment or a building, for such a long time that GAAP treats this lease as if the asset was purchased using borrowed funds. A capital lease creates a lia- bility for the company that acquired the leased asset because it has promised to make payments to another company for several years in the future. If a company has any capital leases, it must disclose them in the notes to the financial statements and will sometimes disclose them in a sepa- rate account in the liabilities section of the balance sheet. Using the most current Forms 10-K for Union Pacific Corporation, complete the require- tions in Appendix A, or they can be found on the company's website Required ments below. To obtain the 10-K you can either use the EDGAR system, following the instruc