Liang Lu is a young entrepreneur who operates Lu Music Services, offering singing les¬ sons and instruction on musical instruments. Lu wishes to expand but needs a loan. The bank requests Lu to prepare a balance sheet and key financial ratios. Lu has not kept formal records but is able to provide the following accounts and their amounts as of December 31, 2005:

Required 1. Prepare a balance sheet as of December 31, 2005, for Lu Music Services.
2. Compute Lu’s debt ratio and its return on assets (from Chapter 1). Assume average assets equal its ending balance.
3. Do you think the prospects of a $15,000 bank loan are good? Why or why not?

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Cash Prepaid Rent....... Accounts Payable .. Annual net income .. $ 1,800. Accounts Receivable $4,800 Prepaid Insurance .. $ 750 4,700 Store Supplies 3,300 Equipment ... 25,000 1,100 Unearned Lesson Fees .... 7,800 Total Equity* 31,450 20,000