Angel Martin is a young entrepreneur who operates Martin Music Services, offering singing lessons and instruction on musical instruments. Martin wishes to expand but needs a $30,000 loan. The bank requests Martin to prepare a balance sheet and key financial ratios. Martin has not kept formal records but is able to provide the following accounts and their amounts as of December 31, 2013.
Cash . . . . . . . . . . . . . . . $ 3,600
Prepaid Rent . . . . . . . . 9,400
Accounts Payable . . . . 2,200
Annual net income . . . 40,000
Accounts Receivable . . . . $ 9,600
Store Supplies . . . . . . . . . 6,600
Unearned Lesson Fees . . . 15,600
Total Equity* . . . . . . . . . 62,900
Equipment . . . . . . . . . . . 50,000
Prepaid Insurance . . . . . $ 1,500
Required:
1. Prepare a balance sheet as of December 31, 2013, for Martin Music Services. (Report only the total equity amount on the balance sheet.)
2. Compute Martin'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 $30,000 bank loan are good? Why or whynot?