Evaluating Data to Support a Loan Application P1-4Pg. 41 Group 3

The Problem On January 1, 2006, three individuals organized West Company as a corporation. Each individual invested $10,000 cash in the business. On December 31, 2006, they prepared a list of resources owned (assets) and a list of 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 were prepared as follows:

Company resources Cash Service supplies inventory (on hand) Service trucks (four practically new) Personal residences of organizers (three houses) Service equipment used in the business (practically new) Bills due from customers (for services already completed) Total $12,000 7,00068,000190,00030,00015,000_______$322,000

Company obligations Unpaid wages to employees Unpaid taxes Owed to suppliers Owed on service trucks and equipment (to a finance company) (to a finance company) Loan from organizer Total $19,000 8,00010,00050,00010,000________$97,000

Question 1 Which of these item do not belong on the balance sheet? Personal residences of organizers (three houses)

Question 2  What additional questions would you raise about the measurement of items on the list? Explain the basis for each question.  Depreciation of value of the “practically new” service trucks and equipments upon usage.

Question 3  If you were advising the local bank on its load decision, which amounts on the list would create special concerns? Explain the basis for each concern and include any recommendations that you have.

Question 3 (Answer)  The cash amount that they have on hand doesn’t even amount to enough to pay unpaid wages to employees.  It is also questionable whether they can pay the debt they owe and the loan itself if it were to go through.

Question 4  In view of your response to (1) and (2), what do you think the amount of stockholder’s equity (i.e., assets minus liabilities) of the company would be? Show your computations.

Question 4 (Answer)  Assets < Original Total - Personal  Assets < $322,000 - $190,000  Stockholder’s Equity < New Total – Liabilities  SE < $132,000 - $97,000