Question

Fred Farmer needs to prepare a balance sheet for his bank. He spent the day getting the following information. Fred needs your help to build a balance sheet, and evaluate it. The information was gathered on 2/1/18

Grain sorghum in storage 4100 cwt @ $5.40 per cwt

Hay on hand 75 ton @ $50.00 per ton

Growing wheat 285 acres @ 24.50 per acre invested

Farm mortgage payment due 4/7/18 $16,000 principle, $20,200 interest

balance after 4/7/18 payment $228,000

Building and improvements $58,000

Note payable this year (feeder cattle) $46,000

Calves (sell in 60 days) 96 head @ $290 per head

Feeder cattle (sell 5/1/18) 142 head @ $580 per head

Operating loan (due 5/15/18) $55,000

Vehicles $16,500

Machinery & Equipment $80,500

Loan on beef cattle payment due 8/1/18 $9,000 principle, $4,200 interest

balance after 8/1/18 payment $38,000

Land market value 1020 acres @ $560 per acre

Beef breeding cows 106 head @ $650 per head

Bulls 4 head @ $1,200 per head

Checking $3,400

Account payable at IFA $1,800

Accounts receivable $2,800

Shop Equipment $2,500

Cummins diesel stock 300 shares @ $55 per share

Other information

Fred paid for $6,000 worth of seed to get a better price. Delivery on 3/15/18

Income and social security taxes due this year are estimated to be $8,200

Ten years ago Fred contributed $50,000 capital to get the business started.

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

Questions:

What is Fred’s Owner’s Equity on February 1st?

How much working capital does Fred have?

What is his current ratio?

What is the debt/asset ratio?

What is the debt/equity ratio?

What is the equity/asset ratio?

Which part of the financial conditions from the balance sheet could be a concern and why?

Fred wants to borrow $50,000 to buy a tractor, it will cost $50,000. If you were the lender would you approve the loan to Fred? Why or why not?

If Fred gets the tractor loan, what affect will the transaction have to Fred’s owner’s equity if no other changes were made to the balance sheet?

mm/dd/yy

mm/dd/yy

Answer 1

The balance sheet for Fred Farmer looks as below:

Assets	Amount	Liabilities	Amount
Current Assets		Current Liabilities
Checking	3,400.00	Accounts payable	1,800.00
Accounts Recievable	2,800.00	Notes Payable	46,000.00
Prepaid Expenses	6,000.00	Bank Loan (Operating)	55,000.00
Marketable Securities (300 * $55)	16,500.00	Loans Payable Due (Beef):
Inventories:		Principle	9,000.00
Sorghum (4,100 * $5.4)	22,140.00	Interest	4,200.00
Hay (75 * $50)	3,750.00	Mortgage Payable Due:
Livestock:		Principle	16,000.00
Feeders (142 * $520)	82,360.00	Interest	20,200.00
Calves (96 * $290)	27,840.00	Income and S.S. tax	8,200.00
Investment in growing wheat (285 * $24.50)	6,982.50	Total Current Liabilities	1,60,400.00
Total Current Assets	1,71,772.50
		Non-Current Liabilities
Non Current Assets		Loan (Beef)	38,000.00
Vehicles	16,500.00	Mortgage	2,28,000.00
Machinery and Equipment	80,500.00	Total Non-Current Liabilities	2,66,000.00
Shop Equipment	2,500.00
Livestock:		Total Liabilities	4,26,400.00
Breeding (106 * $650)	68,900.00
Bulls (4 * $1,200)	4,800.00	Owners' Equity
Buildings and Improvements	58,000.00	Contributed Capital	50,000.00
Land at Market Value (1,020 * $560)	5,71,200.00	Retained earnings	3,05,000.00
Total Non-current Assets	8,02,400.00	Value Adjustment	1,92,772.50
		Total Owners Equity	5,47,772.50
Total Assets	9,74,172.50	Total Liabilities & Owners' Equity	9,74,172.50

1. Fred’s Owner’s Equity on February 1st:

Owners' Equity
Contributed Capital	50,000.00
Retained earnings	3,05,000.00
Value Adjustment*	1,92,772.50
Total Owners Equity	5,47,772.50

*Value Adjustment = Total Balance Sheet Amount - Total Liabilities - Contributed Capital - Retained Earnings

= $974,172.50 - $426,400 - $50,000 - $305,000

= $192,772.50

2. Working Capital of Fred = Total Current Assets - Total Current Liabilities

= $171,772.50 - $160,400

= $11,372.50

3. Current Ratio = Total Current Assets / Total Current Liabilities

= $171,772.50 / $160,400

= 1.07

4.  Debt / Asset Ratio = Total Liabilities / Total Assets

= $426,000 / $974,172.50

= 0.44

5. Debt / Equity Ratio = Total Liabilities / Owners' Equity

= $426,000 / $547,772.50

= 0.78

6. Equity / Asset Ratio = Owners' Equity / Total Assets

= $547,772.50 / $974,172.50

= 0.56

Note: As per HOMEWORKLIB POLICY, in case of multiple sub-questions, only the first four need to be answered.