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 shares 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. (Hint: Increase the account you used to record the purchase of the trucks since the productive life of the truck has been improved.)

f. Shareholder Jingbi Chu paid \(\$ 27,600\) from her personal savings to purchase 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 share capital. Using the T-accounts, record the effects of these transactions by Chu Delivery Company.

2) Prepare a classified statement of financial position 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 statements of financial position:

Compute the company's debt-to-equity 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 debt-to-equity ratio. What recommendation would you make to the bank's vice-president about lending the money to Chu Delivery Company?

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Assets Liabilities End of 2012 $120,000 70,000 End of 2011 $90,000 40,000 50,000 Shareholders' Equity 50,000