Evaluating Data to 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.