Economics - Finance

16. Use relevant information from the following list to prepare a cost basis balance sheet for
January 1, 2019. All listed values are observed as of January 1, 2019.
Cash in bank $9,000
Operating note principal due w/in 12 months 116,000
Total machinery loan principal outstanding 104,000
Accrued interest payable 16,000
Accrued real estate taxes 4,000
Market value of real estate 1,040,000
Operating expenses paid last year 192,000
Original machinery cost 590,000
Original real estate cost 680,000
Machinery loan principal due within 12 months 46,000
Total real estate loan principal outstanding 370,000
Prepaid expenses 36,000
Accumulated machinery depreciation 410,000
Real estate loan principal due within 12 months 30,000
Grain inventory 134,000
Organize the balance sheet under the following headings: Current Assets, Current Liabilities,
Non-current Assets, Non-current Liabilities, Net Worth, and Net Worth plus Liabilities. (Use
space below or back of previous page.)

Answer:

Balance Sheet
January 1, 2019

Current Assets Amount

Cash in bank 9,000

Grain inventory 134,000
Operating expenses paid last year 192,000
Prepaid expenses 36,000
Total Current Assets 371,000

Current Liabilities Amount

Operating note principal due w/in 12 months 116,000

Accrued interest payable 16,000
Accrued real estate taxes 4,000
Machinery loan principal due within 12 months 46,000
Real estate loan principal due within 12 months 30, 000
Total Current Liabilities 212,000

Non-Current Asset
Original machinery cost 590,000
 Accumulated machinery depreciation (410,000)
Original real estate cost 680,000
Total Non-Current Asset 860,000

Non-Current Liabilities
Total machinery loan principal outstanding 104,000
Total real estate loan principal outstanding 370,000

Total Non-Current Liabilities 474,000

Net Worth 545,000

Net Worth plus Liabilities 1,231,000

17. The following information is available concerning business transactions in 2018.

Machinery purchased with cash. 72,000

Principal paid on machinery loan. 43,000
Cash received for machinery sold 54,000
Cash received from neighbor for custom work 8,000
Principal paid on real estate loan 28,000
Prepaid Expenses 1/1/18. 16,000
Accrued interest payable 1/1/18. 14,000
Crop sales cash receipts. 322,000
Interest paid 34,000
Personal withdrawals 49,000
Grain inventory 1/1/18. 140,000
Outstanding machinery loan 1/1/18 147,000
Outstanding real estate loan 1/1/18 398,000
Depreciation expense for 2018 84,000
Operating expenses paid. 178,000
Book value of machinery sold in 2018 58,000
(i.e. the 12/31/17 Book Value)
Accrued real estate taxes 1/1/18. 7,000
Accumulated depreciation of all assets 1/1/18. 384,000
Using the above information, construct an accrual basis income statement for 2018 showing net
farm income in the space below or on the back of the previous page.

(Note: Use the balance sheet from the previous question for any additional inventory information
needed.

Answer:
Income Statement
Income
 Cash received for machinery sold 54,000
Cash received from neighbor for custom work 8,000
Crop sales cash receipts 322,000
Total Income 384,000

Expenses
Machinery purchased with cash. 72,000
Principal paid on machinery loan. 43,000
Principal paid on real estate loan 28,000
Prepaid Expenses 20,000
Interest paid 34,000
Depreciation expense for 2018 84,000
Operating expenses paid. 178,000
Total Expenses 459,000

Net Income -75,000

18. Based on the balance sheet and income statement you constructed in questions 16 and 17,
compute each of the following and identify the financial concept that each measures. For your
information, the opportunity cost of unpaid labor and management for 2018 was $40,000 and the
opportunity cost of capital was 6.5%.

A. What was the current ratio as of 1/1/19?

B. What was the leverage ratio as of 1/1/19?
C. What is the net worth of the business as of 1/1/18?
D. What was the rate of return on equity for 2018?

Answer:

A. current ratio as of 1/1/19 = Current Assets / Current Liabilities = 371,000 / 212,000 =

1.75
B. leverage ratio as of 1/1/19 = Total Liabilities / Total Assets = 686,000 / 1,231,000 = 0.56
C. net worth of the business as of 1/1/18 = opportunity cost of unpaid labor and management
/ 6.5% = 615,385
D. rate of return on equity for 2018 = Net Income/ Shareholder's Equity = -75,000 / 545,000
= -0.138