Question

Fred Farmer needs to prepare a balance sheet for his bank. He spent the day getting the following information. Fred needs your help to build a balance sheet, and evaluate it. The information was gathered on 2/1/18

Grain sorghum in storage 4100 cwt @ $5.40 per cwt

Hay on hand 75 ton @ $50.00 per ton

Growing wheat 285 acres @ 24.50 per acre invested

Farm mortgage payment due 4/7/18 $16,000 principle, $20,200 interest

balance after 4/7/18 payment $228,000

Building and improvements $58,000

Note payable this year (feeder cattle) $46,000

Calves (sell in 60 days) 96 head @ $290 per head

Feeder cattle (sell 5/1/18) 142 head @ $580 per head

Operating loan (due 5/15/18) $55,000

Vehicles $16,500

Machinery & Equipment $80,500

Loan on beef cattle payment due 8/1/18 $9,000 principle, $4,200 interest

balance after 8/1/18 payment $38,000

Land market value 1020 acres @ $560 per acre

Beef breeding cows 106 head @ $650 per head

Bulls 4 head @ $1,200 per head

Checking $3,400

Account payable at IFA $1,800

Accounts receivable $2,800

Shop Equipment $2,500

Cummins diesel stock 300 shares @ $55 per share

Other information

Fred paid for $6,000 worth of seed to get a better price. Delivery on 3/15/18

Income and social security taxes due this year are estimated to be $8,200

Ten years ago Fred contributed $50,000 capital to get the business started.

Retained earnings since the beginning of the business equals $305,000

Questions:

Which part of the financial conditions from the balance sheet could be a concern and why?

Fred wants to borrow $50,000 to buy a tractor, it will cost $50,000. If you were the lender would you approve the loan to Fred? Why or why not?

If Fred gets the tractor loan, what affect will the transaction have to Fred’s owner’s equity if no other changes were made to the balance sheet?

Answer 1

1. Fred Farmer has lesser liquid assets as compared to the amount of current liability. This is a major area of concern that can be highlighted from the balance sheet.

Total liquid assets = Accounts Receivable + Checking + Marketable Securities + Investment in growing wheat

= $2,800 + $3,400 + $16,500 + $6982.50

= $29,682.50

Current liability = $160,400

Thus, it can be seen that Fred Farmer might face challenges to meet its short-term liability.

2. No, I will not approve the loan as it is not viable. Fred Farmer might face difficulties to fulfill its current liability i.e. the lack of liquidity.

3. If no other changes have been made to the balance sheet, the total amount of balance sheet will remain the same whereas the amount of non-current liabilities will increase. To compensate the increase in the amount of non-current liabilities while maintaining the total amount of balance sheet, the amount of owner's equity will decrease.