Evaluating Datato Support a Loan Application (A Challenging Problem)
On January 1, 2011, three individuals organized Northwest Company as a corporation. Each individual invested $10,000 cash in the business. On December 31. 2011, they prepared a list of resources owned (assets) and a list of the debts (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 indicating:
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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