BTN 2-8 Angel Martin is a young entrepreneur who operates Martin Music Services,
ID: 2418543 • Letter: B
Question
BTN 2-8 Angel Martin is a young entrepreneur who operates Martin Music Services, offering singing lessons and instruction on musical instruments. Martin wishes to expand but needs a $30,000 loan. The bank requests that Martin prepare a balance sheet and key financial ratios. Martin has not kept formal records but is able to provide the following accounts and their amounts as of December 31, 2015.
* the total equity amount reflects all owner investments, withdrawals, revenues, and expenses as of december 31, 2015
Required
a) Prepare a balance sheet as of December 31, 2015, for Martin Music Services. (Report only the total equity amount on the balance sheet.)
b) Compute Martin’s debt ratio and its return on assets (the latter ratio is defined in Chapter 1). Assume average assets equal its ending balance.
c) Do you believe the prospects of a $30,000 bank loan are good? Why or why not?
Cash $3,600 accounts receivable $9,600 prepaid insurance $1,500 Prepaid rent 9,400 store supplies 6,600 equipment 50,000 accounts payable 2,200 unearned lesson fees 15,600 total equity* 62,900 annual net income 40,000Explanation / Answer
A./ BALANCE SHEET AS OF DECEMBER 31 2015
B./
DEBT RATIO = TOTAL LIBALITY / TOTAL ASSETS
= ($2200 +$15600) / $80700
= 0.22
RETURN ON ASSETS = (NET INCOME / AVERAGE ASSETS ) *100
= ($40000 / $80700) * 100
= 49.57%
C./
AS THE DEBT RATIO CALCULATED ABOVE SHOWS 0.22 WHICH IS VERY MUCH LOW FROM A GENERAL BENCHMARK OF 0.5, SO IT IS LESS RISKY TO INVEST IN THE COMAPNY.
AGAIN THE RETURN ON ASSETS IS QUITE HANDSOME THAT IT CAN PAY OFF THE INTEREST ON BANK LOAN EASILY, SO THE BANK MAY GOAHEAD WITH THE LOAN FINACING.
LIBALITY AMOUNT $ ASSETS AMOUNT $ TOTAL EQUITY ($62900 + $40000) 102900 CASH 3600 ACCOUNTS RECEIVABLE 9600 ACCOUNTS PAYBLE 2200 PREPAID INSURANCE 1500 UNEARNED LESSON FEES 15600 PREPAID RENT 9400 STORES & SUPPLIES 6600 EQUIPEMENT 50000 TOTAL 80700 TOTAL 80700Related Questions
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