Question

Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $30,000 and has cash on hand of $20,000 contributed by Lanni's owners.

a. Lanni takes out a bank loan. It receives $50,000 in cash and signs a note promising to pay back the loan over three years.
b. Lanni uses the cash from the bank plus $20,000 of its own funds to finance the development of new financial planning software.
c. Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name.
d. Lanni accepts payment in the form of 2,000 shares of Microsoft stock. Lanni sells the shares of stock for $70 per share and uses part of the proceeds to pay off the bank loan.

Required:
a. Prepare its balance sheet just after it gets the bank loan.
b. What is the ratio of real assets to total assets?
c. Prepare the balance sheet after Lanni spends the $70,000 to develop its software product.

Answer 1

Lanni Products

a. Lanni Products

Balance Sheet after the bank loan

Assets:

Cash $70,000

Equipment 30,000

Total assets $100,000

Liabilities:

Bank Loan $50,000

Equity $50,000

Liabilities + Equity $100,000

b. Ratio of real assets to total assets = $30,000/$100,000 = 0.3 or 30%

c. Lanni Products

Balance Sheet after spending the bank loan

Assets:

Cash $0

Software $70,000

Equipment 30,000

Total assets $100,000

Liabilities:

Bank Loan $50,000

Equity $50,000

Liabilities + Equity $100,000

Step-by-step explanation:

a) Data and Calculations:

Lanni Products

Balance Sheet before the bank loan

Assets:

Cash $20,000

Equipment 30,000

Total assets $50,000

Equity $50,000

b) Lanni's Balance Sheets show its financial positions after each of the above mentioned transactions. They rely on the accounting equation with assets = liabilities and equity. With each transaction posted correctly, the equation remains in balance.