Question

Suppose that I am the owner of Turner Elevator & Supply Store in Willow, Oklahoma. I have grain storage capacity of 500,000 bu. that I purchased ve years ago at a cost of $ 15 million. I also purchased other equipment at a cost of $ 2.5 million. I set up a straight line depreciation schedule for the bins assuming 15 years of remaining life at the time of purchase. I assigned a seven year life to the other assets at the time of purchase (I assume that both bins and other equipment have zero salvage value). Currently I have $ 175,000 of cash on hand and accounts receivable of $ 125,000. In addition, I have 100,000 of wheat in the bins that I paid $ 4.05/bu. for at harvest time, and $ 95,000 of inventories on hand (fertilizer, seed, etc.) for sale. However, based on my operating expenses, I compute another $ 0.65 /bu. cost from operations must be added to my inventory of wheat on hand. My mortgage payable (for the purchase of the bins stands) at $ 7.5 million - the original mortgage was for ten years and I have made the standar payments based on a xed payment schedule. I also have an operating loan at the local bank for $ 1 million. Derive my balance sheet at the beginning of year 5. What is my equity?

Answer 1

Equity is nothing but funds available to the share holders. For calculating the Equity we need to add all the funds available to equity share holders like paid up share capital and reserves available to the share holders.

In the given question the information available is for the assets and outside liabilities. We can calculate the equity by applying the following formula.

Equity = Total assets - Outside liabilities

Total Assets:

1) Equipment having 15 years life:

Asset value = $15,000,000

Depreciation = $2,000,000

Net asset value = $13,00,000

2) Equipment having 7 years life

Asset value = $2,500,000

Depreciation =    $357143

Net Asset value = 2,142,857

3) Current assets

i) Cash = $ 175,000

ii) Receivable = $ 125,000

iii) Inventories

a) Wheet = 100,000*$4.70 = 470,000

b) others = $ 95,000

Total assets value = 16,007,857

Out side liabilities = $1,000,000+ $7,500,000 = $8,500,000

Equitty value = $16,007,857 - $8,500,000 = $7,507,857