Charlotte Lebioda grew up in the hotel business. Her parents owned and operated a 100‐ room limited service hotel for 20 years. When Charlotte graduated from hospitality school, her parents retired, turning the business over to Charlotte. 

Her hotel has an appraised value of $6,000,000 and total mortgage debt of $2,000,000, and her initial owners’ equity was $4,000,000. The franchisor with which Charlotte’s property is associated has approached her to see if Charlotte would like to develop a second property that would be located 10 miles from her current hotel. 

The franchisor is proposing a 100‐room property, which can be built at a cost of $8,000,000. In addition, the franchisor has indicated that a special financing arrangement has been put in place that allows existing franchisees to obtain 100% financing if their current properties score in the top 10% of the franchisor’s annual inspection program. Charlotte’s property qualifies for the special financing offer. 

1. Develop the accounting equation for Charlotte’s hotel as it exists prior to constructing the new hotel. 

2. Develop the accounting equation for Charlotte’s two properties, as it would exist if she built the new hotel. 

3. Assume you were advising Charlotte. What would you tell her about the impact of the new hotel on the assets, liabilities, and owners’ equity portions of her new accounting equation? What do you believe are the key factors Charlotte should consider before agreeing to build the new property?