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Microsoft Dynamics CRM Custom Entities

We have two custom entities in CRM, which I will refer to as Entity 1 and Entity 2, which are related to one another. When a record is created in Entity 2 that is related to an existing record in Entity 1, we would like a radio button field on Entity 1 to be switched from a value of "No" to a value of "Yes." In short, we would like some way to have a field show that there is an existed related record.

Is this possible? if so, how do we go about setting it up?
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You can achieve this quickly with a Workflow.

1. Create a new Workflow with Primary Entity = Entity 2
2. Set the Workflow to "Start when:"  ->  Record attributes change...
3. Set the change field to the Entity 1 lookup field (so when you add the parent record, it will fire)
4. Add a Step to "Update Record"
5. Update:  Entity 1
6. Set Properties for the flag field you want to change.  It sounds like you can just set a default to Yes or 1 or whatever you like you flag field type to be.

This will run whenever you link a Entity 2 to an Entity 1.  Note, however, that it will not remove a flag if you should re-parent a record later.
Also note that if you aren't familiar with workflows they can sometimes take a minute or so before they fire.  They run asyncrhonously (in the background) but it sounds like that may still meet your requirements.