Problem

Using a Balance SheetMoon Corporation and Star Corporation are in the same line of busines...

Using a Balance Sheet

Moon Corporation and Star Corporation are in the same line of business and both were recently organized, so it may be assumed that the recorded costs for assets are close to current market values. The balance sheets for the two companies are as follows at July 31, 2015:

MOON CORPORATION BALANCE SHEET JULY 31, 2015

Assets

Liabilities&Owners’ Equity

Cash

$ 18,000

Liabilities:

 

 

Accounts Receivable

26,000

Notes Payable

 

 

Office Equipment

1,200

(due in 60 days)

 

$ 12,400

Building

38,000

Accounts Payable

 

9,600

Land

37,200

Total liabilities

 

$ 22,000

 

 

Stockholders’ equity:

 

 

 

 

Capital Stock

$60,000

 

 

 

Retained Earnings.

38,400

98,400

Total

$120,400

Total

 

$120,400

STAR CORPORATION BALANCE SHEET JULY 31, 2015

Assets

Liabilities&Owners’ Equity

Cash

$ 4,800

Liabilities:

 

 

Accounts Receivable

9,600

Notes Payable

 

 

Office Equipment

12,000

(due in 60 days).

 

$ 22,400

Building

60,000

Accounts Payable

 

43,200

Land

96,000

Total liabilities

 

$ 65,600

 

 

Stockholders’ equity:

 

 

 

 

Capital Stock

$72,000

 

 

 

Retained Earnings.

44,800

116,800

Total

$182,400

Total

 

$182,400

Instructions

a. Assume that you are a banker and that each company has applied to you for a 90-day loan of $12,000. Which would you consider to be the more favorable prospect? Explain your answer fully.


b. Assume that you are an investor considering purchasing all the capital stock of one or both of the companies. For which business would you be willing to pay the higher price? Do you see any indication of a financial crisis that you might face shortly after buying either company? Explain your answer fully. (For either decision, additional information would be useful, but you are to reach your decision on the basis of the information available.)

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