The accounting records of Schmit Co. show the following assets and liabilities as of December 31, 2010 and 2011.
December 31 | 2010 | 2011 |
Cash | $14,000 | $ 10,000 |
Accounts receivable | 25,000 | 30,000 |
Office supplies | 10,000 | 12,500 |
Office equipment | 60,000 | 60,000 |
Machinery | 30,500 | 30,500 |
Building | 0 | 260,000 |
Land | 0 | 65,000 |
Accounts payable | 5,000 | 15,000 |
Note payable | 0 | 260,000 |
Late in December 2011, the business purchased a small office building and land for $325,000. It paid $65,000 cash toward the purchase and a $260,000 note payable was signed for the balance. Janet Schmit, the owner, had to invest an additional $25,000 cash (in exchange for common stock) to enable it to pay the $65,000 cash toward the purchase. The company also pays $1,000 cash per month for dividends.
Required
1. Prepare balance sheets for the business as of December 31, 2010 and 2011. (Hint: Report only total equity on the balance sheet and remember that total equity equals the difference between assets and liabilities.)
2. By comparing equity amounts from the balance sheets and using the additional information presented in the problem, prepare a calculation to show how much net income was earned by the business during 2011.
3. Calculate the December 31, 2011, debt ratio for the business.
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