Kalman Incorporated is a small manufacturing company that makes model trains to sell to toy stores. It has a small service department that repairs customers' trains for a fee. The company has been in business for five years. At December 31, 2010 (the company's fiscal year-end), the accounting records reflected total assets of $500,000 (cash, $120,000; buildings, $310,000; equipment, $70,000), total liabilities of $200,000 (short-term notes payable, $140,000; long-term notes payable, $60,000), and total stockholders' equity of $300,000 (contributed capital, $220,000; retained earnings, $80,000).

During the current year, 2011, the following summarized events occurred:

a. Purchased equipment for $30,000, paying $3,000 in cash and signing a note due in six months for the balance.

b. Issued an additional 10,000 shares of capital stock for $100,000 cash.

c. Borrowed $120,000 cash from the bank and signed a 10-year note.

d. Purchased a delivery truck (equipment) for $10,000; paid $5,000 cash and signed a short-term note payable for the remainder.

e. Built an addition on the factory for $200,000 and paid cash to the contractor.

f. Purchased $85,000 in long-term investments.

g. Returned a $3,000 piece of equipment purchased in (a) because it proved to be defective; received a reduction of its short-term note payable.

h. Lent $2,000 cash to the company president, Adam Kalman, who signed a note with terms showing the principal plus interest due in one year.

i. A stockholder sold $5,000 of his capital stock in Kalman Incorporated to his neighbor.

Required:

1. Was Kalman Incorporated organized as a sole proprietorship, a partnership, or a corporation? Explain the basis for your answer.

2. During 2011, the records of the company were inadequate. You were asked to prepare the summary of the preceding transactions. To develop a quick assessment of their economic effects on Kalman Incorporated, you have decided to complete the tabulation that follows and to use plus (+) for increases and minus (–) for decreases for each account. The first transaction is used as an example.

3. Did you include event (i) in the tabulation? Why?
4. Based on beginning balances plus the completed tabulation, provide the following amounts (show computations):
a. Total assets at the end of the year.
b. Total liabilities at the end of the year.
c. Total stockholders' equity at the end of the year.
d. Cash balance at the end of the year.
e. Total current assets at the end of the year.
5. Compute the financial leverage ratio for 2011. What does this suggest about thecompany?

Transcribed Image Text:

STOCKHOLDERS EQUITY ASSETS LIABILTTIES Short-Term Long Term Contributed Retained Notes Payable Notes Payable Notes Long-Term Captal Earnings 220,000 80,000 Cash Recelvable Investments Equipment Bullding Beg. 120,000 (a)-3.000 70,000 310,000140,000 = +27,000 60,000 +30,000