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

Group 3Group 3

The ProblemThe Problem

On January 1, 2006, three individuals organized On January 1, 2006, three individuals organized West Company as a corporation. Each West Company as a corporation. Each individual invested $10,000 cash in the individual invested $10,000 cash in the business. On December 31, 2006, they business. On December 31, 2006, they prepared a list of resources owned (assets) prepared a list of resources owned (assets) and a list of debts (liabilities) to support a and a list of debts (liabilities) to support a company loan request for $70,000 submitted to company loan request for $70,000 submitted to a local bank. None of the three investors had a local bank. None of the three investors had studied accounting. The two lists were studied accounting. The two lists were prepared as follows:prepared as follows:

Company resourcesCompany resources

CashCash

Service supplies inventory (on hand)Service supplies inventory (on hand)

Service trucks (four practically new)Service trucks (four practically new)

Personal residences of organizers Personal residences of organizers (three houses)(three houses)

Service equipment used in the business Service equipment used in the business (practically new)(practically new)

Bills due from customers Bills due from customers (for services already completed)(for services already completed)

TotalTotal

$$ 12,00012,000

7,0007,000

68,00068,000

190,000190,000

30,00030,000

15,00015,000

______________

$322,000$322,000

Company obligationsCompany obligations

Unpaid wages to employeesUnpaid wages to employees

Unpaid taxesUnpaid taxes

Owed to suppliersOwed to suppliers

Owed on service trucks and equipmentOwed on service trucks and equipment (to a finance company)(to a finance company)

Loan from organizerLoan from organizer

Total Total

$$ 19,00019,000

8,0008,000

10,00010,000

50,00050,000

10,00010,000

________________

$97,000$97,000

Question 1Question 1

• Which of these item do not belong on the balance sheet?

• Personal residences of organizers (three houses)

Question 2Question 2

What additional questions would you What additional questions would you raise about the measurement of items on raise about the measurement of items on the list? Explain the basis for each the list? Explain the basis for each question.question.

Depreciation of value of the “practically Depreciation of value of the “practically new” service trucks and equipments new” service trucks and equipments upon usage. upon usage.

Question 3Question 3

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

Question 3 Question 3 (Answer)(Answer)

The cash amount that they have on hand The cash amount that they have on hand doesn’t even amount to enough to pay doesn’t even amount to enough to pay unpaid wages to employees. unpaid wages to employees.

It is also questionable whether they can It is also questionable whether they can pay the debt they owe and the loan itself pay the debt they owe and the loan itself if it were to go through.if it were to go through.

Question 4Question 4

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

Question 4 Question 4 (Answer)(Answer)

Assets Assets << Original Total - Personal Original Total - Personal Assets Assets << $322,000 - $190,000 $322,000 - $190,000

Stockholder’s Equity Stockholder’s Equity << New Total – Liabilities New Total – Liabilities SE < $132,000 - $97,000SE < $132,000 - $97,000