Lester's Home Healthcare Services was organized on January 1, 2011, by four friends. Each organizer invested \(\$ 10,000\) in the company and, in turn, was issued 8,000 shares. To date, they are the only shareholders. During the first month (January 2011), the company completed the following six transactions:

a. Collected a total of \(\$ 40,000\) from the organizers and, in turn, issued the shares.

b. Purchased a building for \(\$ 65,000\), equipment for \(\$ 16,000\), and three acres of land for \(\$ 12,000\); paid \(\$ 13,000\) in cash, and signed a 10 percent mortgage for the balance payable to the local bank in 15 years. (Hint: Five different accounts are affected.)

c. One shareholder reported to the company that he sold 500 shares to another shareholder for a cash consideration of \(\$ 5,000\).

d. Purchased short-term investments for \(\$ 3,000\) cash.

e. Sold one acre of land costing \(\$ 4,000\) to another company for \(\$ 4,000\) cash.

f. Loaned one of the shareholders \(\$ 5,000\) for moving costs, in exchange for a signed note due in one year.

Required:

1) Was Lester's Home Healthcare Services organized as a sole proprietorship, a partnership, or a corporation? Explain the basis for your answer.

2) During the first month, the records of the company were inadequate. You were asked to prepare a summary of the preceding transactions. To develop a quick assessment of the transaction effects on Lester's Home Healthcare Services, 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 all the transactions in the tabulation? If not, which one did you exclude and why?
4) Based only on the completed tabulation, provide the following amounts at January 31, 2011 (show computations):

a. Total assets

b. Total liabilities

c. Total shareholders' equity

d. Cash balance

e. Total current assets 5) Compute the debt-to-equity ratio at January 31,2011 . What does this suggest about the company?

Transcribed Image Text:

Assets Liabilities Cash Short-Term Investments Notes Receivable Land Building Equipment Notes Payable (a) 140,000 + Shareholders' Equity Share Capital Retained Earnings +40,000