Financial Accounting
9th Edition
ISBN: 9781259738692
Author: Libby
Publisher: MCG
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Chapter 1, Problem 1.4P
Evaluating Data to Support a Loan Application (Challenging)
On January 1 of the current year, three individuals organized Northwest Company as a corporation. Each individual invested $10,000 cash in the business. On December 31 of the current year, they prepared a list of resources owned (assets) and debts owed (liabilities) to support a company loan request for $70,000 submitted to a local bank. None of the three investors had studied accounting. The two lists prepared were as follows:
| Company Resources | |
| Cash | $ 12,000 |
| Service supplies inventory (on hand) | 7,000 |
| Service trucks (four, practically new) | 57,000 |
| Personal residences of organizers (three houses) | 190,000 |
| Service equipment used in the business (practically new) | 30,000 |
| Bills due from customers (for services already completed) | 15,000 |
| Total | $311,000 |
| Company Obligations | |
| Unpaid wages to employees | $ 19,000 |
| Unpaid taxes | 8,000 |
| Owed to suppliers | 10,000 |
| Owed on service trucks and equipment (to a finance company) | 45,000 |
| Loan from organizer | 10,000 |
| Total | $ 92,000 |
Required:
Prepare a short memo in which you discuss the following:
- 1. Which of these items do not belong on the
balance sheet ? (Bear in mind that the company is considered to be separate from the owners.) - 2. What additional questions would you raise about the measurement of items on the list? Explain the basis for each question.
- 3. If you were advising the local bank on its loan decision, which amounts on the list would create special concerns? Explain the basis for each concern and include any recommendations that you have.
- 4. In view of your responses to (1) and (2). What do you think the amount of stockholders’ equity (i.e.. assets minus liabilities) of the company would be? Show your computations.
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Chapter 1 Solutions
Financial Accounting
Ch. 1 - Define accounting.Ch. 1 - Briefly distinguish financial accounting from...Ch. 1 - Prob. 3QCh. 1 - Prob. 4QCh. 1 - Prob. 5QCh. 1 - Complete the following: Name of Statement...Ch. 1 - What information should be included in the heading...Ch. 1 - What are the purposes of (a) the income statement,...Ch. 1 - Explain why the income statement and the statement...Ch. 1 - Prob. 10Q
Ch. 1 - Prob. 11QCh. 1 - Explain the equation for the income statement....Ch. 1 - Explain the equation for the balance sheet. Define...Ch. 1 - Explain the equation for the statement of cash...Ch. 1 - Explain the equation for retained earnings....Ch. 1 - The financial statements discussed in this chapter...Ch. 1 - Prob. 17QCh. 1 - Prob. 18QCh. 1 - (Supplement A) Briefly differentiate between a...Ch. 1 - Prob. 20QCh. 1 - Which of the following is not one of the four...Ch. 1 - Prob. 2MCQCh. 1 - Prob. 3MCQCh. 1 - Which of the following regarding retained earnings...Ch. 1 - Which of the following is not one of the four...Ch. 1 - Prob. 6MCQCh. 1 - Prob. 7MCQCh. 1 - Which of the following is true regarding the...Ch. 1 - Prob. 9MCQCh. 1 - Prob. 10MCQCh. 1 - Matching Elements with Financial Statements M1-1...Ch. 1 - Matching Financial Statement Items to Financial...Ch. 1 - Prob. 1.3MECh. 1 - Prob. 1.1ECh. 1 - Matching Financial Statement Items to Financial...Ch. 1 - Matching Financial Statement Items to Financial...Ch. 1 - Preparing a Balance Sheet Honda Motor Corporation...Ch. 1 - Completing a Balance Sheet and Inferring Net...Ch. 1 - Prob. 1.6ECh. 1 - Preparing an Income Statement and Inferring...Ch. 1 - Prob. 1.8ECh. 1 - Inferring Values Using the Income Statement and...Ch. 1 - Inferring Values Using the Income Statement and...Ch. 1 - Preparing an Income Statement and Balance Sheet...Ch. 1 - Preparing an Income Statement and Balance Sheet...Ch. 1 - Preparing a Statement of Stockholders Equity...Ch. 1 - Focus on Cash Flows: Matching Cash Flow Statement...Ch. 1 - Preparing an Income Statement, Statement of...Ch. 1 - Analyzing a Student's Business and Preparing an...Ch. 1 - Comparing Income with Cash Flow (Challenging)...Ch. 1 - Evaluating Data to Support a Loan Application...Ch. 1 - Preparing an Income Statement, Statement of...Ch. 1 - Analyzing a Students Business and Preparing an...Ch. 1 - Prob. 1.3APCh. 1 - Prob. 1.1CONCh. 1 - Finding Financial Information LO1-1 Refer to the...Ch. 1 - Prob. 1.2CPCh. 1 - Comparing Companies within an Industry Refer to...Ch. 1 - Using Financial Reports: Identifying and...Ch. 1 - Prob. 1.5CPCh. 1 - Prob. 1.6CPCh. 1 - Prob. 1.7CP
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