Response to the following problem:
Lisa Langely is a young entrepreneur who operates Langely Music Services, offering singing lessons and instruction on musical instruments. Langely wishes to expand but needs a $15,000 loan. The bank requests Langely to prepare a balance sheet and key financial ratios.
Langely has not kept formal records but is able to provide the following accounts and their amounts as of December 31, 2011.
Cash . . . . . . . . . . . . . . . $ 1,800
Accounts Receivable. . . . $4,800
Prepaid Insurance . . . . . $ 750
Prepaid Rent . . . . . . . . 4,700
Store Supplies . . . . . . . . . 3,300
Equipment . . . . . . . . . . . 25,000
Accounts Payable . . . . 1,100
Unearned Lesson Fees. . . 7,800
Total Equity* . . . . . . . . . 31,450
Annual net income . . . 20,000
Required:
1. Prepare a balance sheet as of December 31, 2011, for Langely Music Services. (Report only the total equity amount on the balance sheet.)
2. Compute Langely's debt ratio and its return on assets . Assume average assets equal its ending balance.
3. Do you believe the prospects of a $15,000 bank loan are good? Why or why not?