At the beginning of year 2012, Lee Delivery Company Inc., which was organized in 2011, 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. The following transactions occurred during year 2011 (the company's first year of operations):

a. Received cash from the organizers, \(\$ 40,000\).

b. Purchased land for \(\$ 12,000\) and signed a one-year note (at a 10 percent annual interest rate).

c. Bought two used delivery trucks for operating purposes at the start of the year at a cost of \(\$ 10,000\) each; paid \(\$ 2,000\) cash and signed a promissory note for the balance, payable over the next three years (at an annual interest rate of 11 percent).

d. Sold one-fourth of the land for \(\$ 3,000\) to Birkins Moving, which promised to pay in six months.

e. Paid \(\$ 2,000\) cash to a truck repair shop for a new motor for one of the trucks. (Hint: Increase the account you used to record the purchase of the trucks since the usefulness of the truck has been improved.)

f. Traded the other truck and \(\$ 6,000\) cash for a new one. The old truck's fair value is \(\$ 10,000\).

g. Shareholder Jonah Lee paid \(\$ 22,000\) cash for a vacant lot (land) for his personal use.

h. Collected the amount of the note due from Birkins Moving in (d).

i. Paid one-third of the principal of the note due for the delivery trucks in (c).

Required:
1) Set up appropriate T-accounts with beginning balances of \(\$ 0\) for cash, short-term notes receivable, land, equipment, short-term notes payable, long-term notes payable, and share capital. Using the T-accounts, record the effects of these transactions on Lee Delivery Company.
2) Prepare a classified statement of financial position for Lee Delivery Company at the end of 2011. Compute the debt-to-equity ratio at that date.
3) What recommendation would you make to the bank's vice-president about lending the money to Lee Delivery Company 4) At the end of the next two years, Lee Delivery Company reported the following amounts on its statements of financial position:

Transcribed Image Text:

Assets Liabilities Shareholders' equity End of 2013 $120,000 70,000 50,000 End of 2012 $90,000 40,000 50,000 Compute the company's debt-to-equity ratio for 2012 and 2013. What is the trend and what does this suggest about the company?