Chu Delivery Company, Inc., was organized in 2010. The following transactions occurred during year 2010:
a. Received $40,000 cash from organizers in exchange for stock in the new company.
b. Purchased land for $12,000, signing a one-year note (ignore interest).
c. Bought two used delivery trucks for operating purposes at the start of the year at a cost of $10,000 each; paid $4,000 cash and signed a note due in three years for the rest (ignore interest).
d. Sold one-fourth of the land for $3,000 to Pablo Moving, which signed a six-month note.
e. Paid $1,000 cash to a truck repair shop for a new motor for one of the trucks.
f. Stockholder Jingbi Chu paid $27,600 cash for a vacant lot (land) for her personal use.

Required:
1. Set up appropriate T-accounts with beginning balances of zero for Cash, Short-Term Note Receivable, Land, Equipment, Short-Term Notes Payable, Long-Term Notes Payable, and Contributed Capital. Using the T-accounts, record the effects of these transactions by Chu Delivery Company.
2. Prepare a classified balance sheet for Chu Delivery Company at December 31, 2010.
3. At the end of the next two years, Chu Delivery Company reported the following amounts on its balance sheets:

Compute the company's financial leverage ratio for 2011 and 2012. What is the trend and what does this suggest about the company?
4. At the beginning of year 2013, Chu Delivery Company applied to your bank for a $100,000 loan to expand the business. The vice president of the bank asked you to review the information and make a recommendation on lending the funds based solely on the results of the financial leverage ratio. What recommendation would you make to the bank's vice president about lending the money to Chu DeliveryCompany?

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1,201 December 31, 2012 Assets Liabilities Stockholders' Equity $90,000 40,000 50,000 $120,000 60,000 60,000