Question

Analyze each these personal financial transactions and determine their impact on your clients balance sheet:

Your client buys a $50,000 car with a 20% down payment at a 6% interest rate. Your client buys an antique with a market value of $5,000 and pays $3,500 in cash for it. Your clients investments earn $22,000 in this bull market. Your client refinances their current 30 years mortgage to a 15 year mortgage and amortizes all closing costs.

Identify and describe the opportunities you see from your clients personal financial statements. Be sure to discuss the strengths and opportunities these statements reflect.

Answer 1

You have not attached any balance sheet. In that case, I will not be able to answer the last part of the question: Identify and describe the opportunities you see from your clients personal financial statements. Be sure to discuss the strengths and opportunities these statements reflect.

I have therefore addressed all the earlier parts.

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Case 1 - Cost of Car = $ 50,000

Downpayment = 20% = 20% x 50,000 = 10,000

Loan amount = Cost - Downpayment = 50,000 - 10,000 = 40,000

So the impact on Balance Sheet:

• Under personal use asset, Car / Auto will increase by $ 50,000
• Cash will reduce by 10,000 for the downpayment
• A new line item loan will be created for $ 40,000$ on long term liability side

Impact on Income statement

• Incremental interest expense of 6% x 40,000 = $ 2,400

Case 2 -

Cost of asset (Antique) = 5,000

Cash payment = 3500

Payable = 5,000 - 3,500 = 1,500

So the impact on Balance Sheet:

• Asset Side will increase by 5,000
• Cash will reduce by 3,500
• Creditors will increase by 1,500

Impact on Income statement

• No impact

Case 3 - Mark to market gains; no impact on cash

So the impact on Balance Sheet:

• On Asset Side, investments will increase by 22,000

Impact on Income statement

• Incremental Unrealized gains of 22,000

Case 4 - Refinancing of Mortgage.

So the impact on Balance Sheet:

• Change in the name of the mortage, from 30- year to 15- year.
• Cash will go down to the extent of closing cost (can't be calculated as figures have not been made available)

Impact on Income statement

• Closing cost will appear as an expenses and will reduce the profit to that extent