Question

C1010: Accountng PART C. Comparing balance sheet (7 marks) ABC company and XVZ company conduct the same type of business. Both are recently formed entitles, the balance sheets of the two companies as at 30 June 2020 are as follows: ABC Company Balance sheet Asat 30 June 2020 Assets Current assets Cash at bank 2 400 Accounts recelvable 4 800 Total current assets 7 200 Noncurrent Assets Office equipment land 6 000 18 000 building Total non-current assets 30 000 54 000 Total assets 61 200 liabillties Current liabilities Accounts payable Loan payable due 30 September 2020 Total current liabilities Total liabilities 21 600 31 200 800 52 800 8 400 Net assets Owner's equity P. Cable Capital Total owners' equity 8 400 8 400 XY2 Compamy Balance sheet As at 30 June 2020 Assets Current assets Cash at bank HC1010 Accounting for Business Page 4 of 7 Accounts receivable 4 000 Total current assets 26 000 Noncurrent Assets Office equipment land 600 13 600 bu lding 6 000 Page 4 of 7 Accounts receivable 24 000 Total current assets 26 000 Noncurrent Assets Office equipment land 600 13 600 building Total non-current assets Total assets 6 000 20 200 46 200 liabilities Current liabilities Accounts payable 4 800 Loan payable due 30 September 2020 Total current liabilities 7 200 12 000 Total liabilities 12 000 Net assets 34 200 Owner's equity P. Cable Capital 34 20034 200 Total owners' equity You are required to answer the following questions based on the information provided above: a. assuming that you are a banker and that the owner of each business has applied for a short-term loan of $6000 (repayable in six months), which application would you select as being the more favourable? Explain b. assuming that you are a businessperson interested in buying one or both companies, and both owners have indicated their intentions to sell, for which business would you be wiling to pay the price, assuming you will be taking over the existing liablities of the company? explain c. if the existing owners agreed to be accountable for all existing liabilities, how would this change your decision in (b), if at all? Page 4 of 7 Accounts receivable 24 000 Total current assets 26 000 Noncurrent Assets Office equipment 600 land building 13 600 6 000 Total non-current assets 20 200 Total assets 46 200 liabilities Current liabilities Accounts payable 4 800 Loan payable due 30 September 2020 Total current liabilities 7 200 12 000 Total liabilities 12 000 Net assets 34 200 Owner's equity P. Cable Capital 34 200 Total owners' equity 34 200 You are required to answer the following questions based on the information provided above: a. assuming that you are a banker and that the owner of each business has applied for a short-term loan of $6000 (repayable in six months), which application would you select as being the more favourable? Explain. b assuming that you are a businessperson interested in buying one or both companies, and both owners have indicated their intentions to sell, for which business would you be willing to pay the higher price, assuming you will be taking over the existing liabilities of the company? explain. c if the existing owners agreed to be accountable for all existing liabilities, how would this change your decision in (b), if at all?

Answer 1

A. Being a banker, I would check certain ratios of the company before providing short term loans to any company.

Since, its a short term loan, I will check Current Ratio, the better the ratio, the more favourable it would be.

Current Ratio (CR) = Current Assets/Current Liabilities

For ABC,

Current Ratio  = 7200/12000 = 0.6

For XYZ,

Current Ratio = 26000/12000 = 2.17

Since XYZ has a favourble Current ratio, short term loan of $6000 can be given to them.

B. Being a businessman. i would calculate the Net Worth of the company to chose in which one to invest,

Net Worth = Total Assets - Total Liabilities

For ABC,

Net Worth = 61,200 - 52,800 = 8,400.

For XYZ,

Net Worth = 46,200 - 12,000 = 34,200.

Since XYZ's Net worth is much more, I would be willing to pay the higher price for it.

c. If the liabilities are taken by the existing owners,

Net Worth = Total Assets [Since, liabilities are zero]

For ABC,

Net Worth = 61,200

For XYZ,

Net Worth = 46,200

Since ABC's Net worth is much more, I would be willing to pay the higher price for it.