Determining Financial Statement Effects of Various Transactions and Interpreting the Debtto-Equity Ratio Kadoum 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 the end of the most recent year, 2010, the accounting records reflected total assets of \(\$ 500,000\) (cash, \(\$ 120,000\); buildings, \(\$ 310,000\); equipment, \(\$ 70,000\) ) and total liabilities of \(\$ 200,000\) (short-term notes payable, \(\$ 140,000\); long-term notes payable, \(\$ 60,000\) ), and total shareholders' equity of \(\$ 300,000\) (share capital, \(\$ 220,000\); retained earnings, \(\$ 80,000\) ). During the current year, 2011 , the following summarized transactions were completed:

a. Issued 10,000 shares for \(\$ 100,000\) cash.

b. Borrowed \(\$ 120,000\) cash from the bank and signed a 10 -year, 12 percent note.

c. Built an addition onto the factory for \(\$ 200,000\) and paid cash to the contractor.

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

e. Purchased \(\$ 85,000\) in long-term investments.

f. Returned a defective piece of the equipment purchased in transaction \((d)\); received a reduction of \(\$ 3,000\) on the note payable.

g. Paid \(\$ 12,000\) of the principal due on the note in \((b)\).

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

i. Loaned \(\$ 2,000\) cash to the company president, Zeki Kadoum, who signed a note promising to pay the amount and annual interest at the rate of 10 percent within one year.

j. A shareholder sold some of her shares in Kadoum Incorporated to her neighbour for \(\$ 5,000\).

k. Received \(\$ 250\) cash from Mr. Kadoum on the note due, transaction (i).

Required:

1) Prepare a summary of the preceding transactions. To develop a quick assessment of the transaction effects on Kadoum 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.

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Cash (a) -100,000 Notes Assets Long-Term Receivable Investments Equipment Building Liabilities Short-Term Long-Term Notes Payable Notes Payable Shareholders' Equity + Share Retained Capital Earnings +100,000 2. Did you include all transactions in the tabulation? If not, which one did you exclude and why? 3. Based on beginning balances plus the completed tabulation, calculate the following amounts at the end of 2011 (show computations): a. Total assets b. Total liabilities c. Total shareholders' equity d. Cash balance e. Total current assets 4. Compute the company's debt-to-equity ratio at the end of the year. What does this ratio suggest to you about Kadoum Incorporated?