Ted's Taco Shop has total assets of $5 million. Forty percent of these assets are financed with debt of which $400,000 is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $1 million. Using this information what is the balance for long-term debt and retained earnings on Ted's Taco Shop's balance sheet?

Long-term debt 1,600,000

RE 2,000,000

Explanation:

Assets = 5,000,000

40% of assets financed with debt:

5,000,000 x 40% = 2,000,000

debt can be either short or long thus if short term debt = 400,000

long term debt: total debt - short term debt

2,000,000 - 400,000 = 1,600,000

now with the basic accounting equation we solve for RE

Assets = liabilities + equity

5,000,000 = 2,000,000 + equity

equity = 3,000,000

equity in this scenario is compose of common stock and their additional paid-in which total is 1,000,000

and retained earnings Hence:

3,000,000 - 1,000,000 = 2,000,000 retained earnings