Lisa Langely is a young entrepreneur who operates Langely Music Services, offering singing…

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 (the latter ratio is defined in Chapter 1). 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?

 

 

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