Prescott, Inc. manufactures and sells footballs. You have been asked to evaluate Prescott’s credit worthiness for a new line of credit with your bank of up to $300,000. If approved, this line of credit would permit Prescott to borrow up to $300,000 at an annual interest rate of 7%. Interest would be paid annually, and the entire amount borrowed would be due in five years. You must recommend that your bank either approve or reject Prescott’s application based on the above terms. You must support your recommendation and must provide the following for Prescott: 1. 2021 Adjusted Trial Balance (show all adjustments from unadjusted to adjusted trial balance) 2. 2021 Income Statement 3. 2021 Balance Sheet 4. 2021 current ratio, acid test ratio, debt to equity ratio, times interest earned ratio, profit margin on sales, return on (average) assets, and inventory turnover ratio based on Prescott’s existing debt. Use the 2021 income statement and balance sheet you prepare as necessary for your ratio calculations. You must show all calculations. (Round to 2 decimals) 5. Current ratio, debt to equity ratio and times interest earned ratio assuming Prescott borrows the entire $300,000 under the proposed credit line. Assume the entire $300,000 borrowed is kept in cash. You must show all calculations (Round to 2 decimals) Prescott’s 2021 Unadjusted Trial Balance is:

DEBITS

Cash 987,500 Accounts Receivable 250,000 Supplies 30,000 Prepaid Rent 20,000 Inventory 750,000 Equipment 3,500,000 Cost of Goods Sold 3,696,550 Salaries Expense 1,150,000 Rent Expense 220,000 Interest Expense 43,450

CREDITS

LIFO Reserve 45,000 Accumulated Depreciation 645,714 Accounts Payable 135,000 Notes Payable (due within 12 months) 48,000 Interest Payable 7,500 Notes Payable (long-term) 450,000 Common Stock 3,000,000 Retained Earnings 566,286 Sales Revenue 5,750,000

1. Prescott’s fiscal year end is December 31. 2. 2021 annual depreciation expense of $300,000 needs to be recorded. 

2. A final year-end inventory count indicated that $10,000 in supplies were still on hand. 

3. Prescott’s annual rent is $240,000 which it prepays on January 1st each year. December’s rent has not yet been recorded. 

4. The current Note Payable of $48,000 has an annual interest rate of 5%. Prescott accrues interest on this note monthly (on the last day of the month) but pays the monthly interest 10 days later. Prescott has not yet accrued December’s interest expense or payable. 

5. The long-term Note Payable of $450,000 has an annual interest rate of 10%. Interest payments are due quarterly on the 15th day of January, April, July, and October. Prescott accrues interest monthly and has already recorded the appropriate interest expense and payable for October and November, but not for December. 

6. Prescott tracks inventory internally using FIFO but prepares its financial statements based on LIFO. Prescott computes the 2021 ending inventory based on LIFO to be $690,000. Any required year-end adjustment has not yet been made. 

7. Prescott’s 2020 ending total assets and ending LIFO inventory were $4,200,000 and $670,000, respectively. 

8. In Prescott’s industry the average debt to equity ratio is 0.30 and the average timed interest earned ratio is 

9. Your bank uses these industry averages when making credit decisions. 

10. Prescott’s income tax rate is 25%.

Answer rating: 100% (QA)

2021 Adjusted Trial Balance DEBITS Cash 987500 Accounts Receivable 250000 Supplies 20000 Prepaid Rent 20000 Inventory 750000 Equipment 3500000 Cost of Goods Sold 3696550 Salaries Expense 1150000 Rent ... View the full answer