The accounting records ot Schmit Co. show the following assets and liabilities as of December 31, 2004, and 2005:

Late in December 2005, the business purchased a small office building and land for \($325,000.\) The business paid \($65,000\) cash toward the purchase and a \($260,000\) note payable was signed for the balance. Schmit had to invest an additional \($25,000\) cash to enable it to pay the \($65,000\) cash. Schmit also withdraws \($1,000\) cash per month from the business for personal use.

Required

1. Prepare balance sheets for the business as of December 31, 2004, and 2005. (Remember that total equity equals the difference between assets and liabilities.)
2. By comparing equity amounts from the balance sheets and using the additional information presented in the problem, prepare a calculation to show how much net income was earned by the business during 2005.
3. Calculate the December 31, 2005, debt ratio for the business.

Transcribed Image Text:

December 31 2004 2005 Cash Accounts receivable Office supplies $14,000 $ 10,000 25,000 30,000 10,000 12,500 Office equipment 60,000 60,000 Machinery 30,500 30,500 Building 0 260,000 Land.... 0 65,000 Accounts payable 5,000 15,000 Note payable 0 260,000