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. 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 . . . . . . 40,000 *The total equity amount reflects all owner investments, withdrawals, revenues, and expenses as of December 31. Required 1. Prepare a balance sheet as of December 31 for Martin Music Services. (Report only the total equity amount on the balance sheet.) 2. 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. 3. Do you believe the prospects of a $30,000 bank loan are good? Why or why not?
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
records but is able to provide the following accounts and their amounts as of December 31. Cash . . . . . . . . . . . . . . . . . $ 3,600
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 . . . . . . 40,000
*The total equity amount reflects all owner investments, withdrawals, revenues, and expenses as of December 31.
Required
1. Prepare a balance sheet as of December 31 for Martin Music Services. (Report only the total equity
amount on the balance sheet.)
2. 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.
3. Do you believe the prospects of a $30,000 bank loan are good? Why or why not?
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