Question:
Lisa Langely is a young entrepreneur who operates Langely Music Services, offering singing lessons and instruction on musical instruments. Langely wishes to expand but needs a $15,000 loan. The bank requests Langely to prepare a balance sheet and key financial ratios. Langely has not kept formal records but is able to provide the following accounts and their amounts as of December 31, 2011.
|
Cash
|
$ 1,800
|
Accounts Receivable
|
$4,800
|
Prepaid Insurance
|
$ 750
|
|
Prepaid Rent
|
4,700
|
Store Supplies
|
3,300
|
Equipment
|
25,000
|
|
Accounts Payable
|
1,100
|
Unearned Lesson Fees
|
7,800
|
Total Equity
|
31,450
|
|
Annual net income
|
20,000
|
|
|
|
|
Required
1. Prepare a balance sheet as of December 31, 2011, for Langely Music Services. (Report only the total equity amount on the balance sheet.)
2. Compute Langely's debt ratio and its return on assets. Assume average assets equal its ending balance.
3. Do you believe the prospects of a $15,000 bank loan are good? Why or why not?