The balance sheet for the Long Drive Golf Company on September 30, 2010 is presented below:

Question

Long Drive Golf Company Balance Sheet
September 30, 2010
Cash $528,000 Accounts payable $1,568,000
Accounts receivable 1,216,000 Notes payable 752,000
Inventory 2,400,000 Total current liabilities 2,320,000
Fixed assets 5,632,000 Long-term debt 2,336,000
Common stock 3,200,000
Total assets $9,776,000 Retained earnings 1,920,000
Total liabilities and
stockholders' equity $9,776,000
The treasurer of the firm wants to issue $1,200,000 in long-term bonds to be used as follows:
1. $240,000 to reduce accounts payable
2. $192,000 to retire notes payable
3. $128,000 to increase cash on hand
4. $640,000 to increase inventories
a. Assuming that the loan is obtained, construct a pro forma balance sheet for December 31, 2010, for Long
Drive Golf Company that reflects the use of the funds provided.
b. Was the liquidity of Long Drive Golf Company improved by the loan?

Answer 1

Long Drive Golf Co.
Pro Forma Balance Sheet
December 31, 2010
Assets:
Cash $656,000
Accounts receivable 1,216,000
Inventory 3,040,000
Total current assets $4,912,000
Fixed assets 5,632,000
Total assets $10,544,000
Liabilities and owners' equity:
Accounts payable $1,328,000
Notes payable 560,000
Total current liabilities $1,888,000
Long-term debt $3,536,000
Common stock 3,200,000
Retained earnings 1,920,000
Total liabilities and stockholders'
equity $10,544,000
b. The liquidity has improved.
Current Ratio Quick Ratio
Before the bond issue 1.79 0.75
After the bond issue 2.60 0.99