Rhonda Rancher has applied for a loan. Her banker, Larry Loanmaker, says the old

Question

Rhonda Rancher has applied for a loan. Her banker, Larry Loanmaker, says the old balance sheet on file must be brought up to date before a loan will be considered. Rhonda spends the rest of the afternoon taking inventory and gathering other information. Complete the balance sheet on the attached pages using the information below compiled by Rhonda on February 15.

Milo on hand                                                                                         4200 cwt. @ $4.40 per cwt.

Hay on hand                                                                                              75 tons @ $50.00 per ton

Growing wheat                                                                                      280 acres @ $22.50 per acre

Farm mortgage (due 4/01)                                                                                      $14,000 principal

                                                                                                                   $20,000 accrued interest

                                                                                            balance after 4/01 payment      $208,000

Buildings & improvements                                                                                                   $48,000

Note payable on feeder cattle (all due 11/15)                                                                         $34,000

Calves (to be sold in May)                                                                           98 head @ $275 per head

Feeder cattle (to be sold in 60 days)                                                           138 head @ $575 per head

Note payable at bank (all due 3/1)                                                                                          $52,000

Vehicles                                                                                                                              $15,500

Other machinery & equipment                                                                                              $80,500

Loan on beef cows (due 10/01)                                                                               $9,000 principal,

                                                                                                                     $3,900 accrued interest

                                                                                           balance after 10/1 payment     $38,000

Land (present market value)                                                                   1020 acres @ $560 per acre

Beef breeding cows                                                                                    106 head @ $650 per head

Bulls                                                                                                                 4 head @ $1,000 each

Checking account balance                                                                                                         $5,400

Account payable at Joe's Feed & Seed                                                                                   $4,200

Account receivable                                                                                                                   $1,600

Shop Equip. (welder, lathe, drill press, etc.)                                                                              $2,000

Ford Motor Co. stock                                                                              200 shares @ $65 per share

Other Information

            1)         Has paid in advance for $6,000 worth of feed in order to get a good price on it. The feed will be delivered in May.

            2)         Income and social security taxes on last year’s income is estimated at $7,200.

            3)         Rhonda contributed $50,000 to get her business started.

            4)         Retained earnings since the beginning of the business equals $305,000.

1.         What is Rhonda's owner's equity as of February 15?

2.         How much working capital does Rhonda have?

3.         What is her current ratio?

4.         What is her debt/asset ratio?

5.         What is her debt/equity ratio?

6.        What is her equity/asset ratio?

7.   Assume you are a financial consultant hired by Rhonda to analyze her financial condition. Based on this balance sheet, what part of her financial condition is most in need of improvement? WHY?

8.         What does this balance sheet tell you about the amount of profit Rhonda made last year? Explain your answer?

9.         Rhonda wants to borrow $50,000 from the bank to buy additional beef breeding cows. They will cost $50,000. Assume the loan is made, the cows are purchased.

a)         What will Rhonda's owner's equity be immediately after the transactions are completed if there are no other changes on her balance sheet?

b)         What will her debt/asset ratio be?

c)         What will be her debt/equity ratio be?

10.       If you were Larry Loanmaker, would you loan Rhonda the money? Why?

Explanation / Answer

1) Owner's Equity = Assets - Liabilities

First calculate Assets:

Milo on Hand = 4200 x 4.40 = $18480

Hay on Hand = 75 x 50 = $3750

Growing Wheat = 280 x 22.50 = $6300

Calves = 98 x 275 = $26950

Feeder Cattle = 138 x 575 = $79350

Vehicles = $15500

other machinery and equipment = $80500

Land = 1020 x 560 = $571200

Beef breeding cows = 106 x 650 = $68900

Bulls = 4 x 1000 = $4000

Total Assets = $874,730

Now calculate Liabilities:

Farm Mortgage = $14000

Accrued Interest = $20000

Buildings and improvements = $48000

Payable on feeder cattle = $34000

Payable at bank = $52000

Loan on beef cows = $9000

Accrued Interest = $3900

Accounts Payable = $4200

Shop equip. = $2000

Total Liabilities = $187,100

Owner's Equity = Assets - Liabilities

= 874,730 - 187100

= $687,630

2) Working Capital = Current assets - Current Liabilities

= 868430 - 187100 (Please see part (3) for current assets and current liabilities calculations)

= $681,330  

3) Current Ratio = Current Assets/ Current Liabilities

Calculate Current Assets = Milo on hand + Hay on Hand + Calves + Feeder cattle + Vehicles + Other equipments + Land + Beef + Bulls

= $868,430

Current Liabilities = $187,100

Current Ratio = Current Assets/ Current Liabilities

= 868430/187100

= 4.64

4) Debt/equity ratio = Debt/ Equity

= 187100/ 687630

= 0.27

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