Question
Durango Company started Year 2 with beginning balances of $2,500 cash, $2,000 note payable, and $1,900 common stock. During the year, Durango generated $1,900 of
Durango Company started Year 2 with beginning balances of $2,500 cash, $2,000 note payable, and $1,900 common stock. During the year, Durango generated $1,900 of cash revenue and $1,800 of cash expenses. Durango also purchased land for $2,400 cash. If the note payable is due on January 1, Year 3, was it a good idea to purchase the land?
a.) Yes, because the company can combine its ending balances from common stock and retained earnings to pay off the note.
b.) Yes, because the company was profitable in Year 2.
c.) No, because the company will not have enough cash to pay off the note.
d.) No, because the company does not have enough retained earnings at the end of Year 2.
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