Angel Martin is a young entrepreneur who operates Martin Music Services, offering singing lessons and instruction on

Question:

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 why not?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...