Bailey Delivery Company, Inc., was organized in 2018 in Wisconsin. The following transactions occurred during the year: Received cash from investors in exchange for 10,000 shares of stock (par value of $1.00 per share) with a market value of $4 per share.
Purchased land in Wisconsin for $16,000, signing a one-year note (ignore interest).
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).
Paid $1,000 cash to a truck repair shop for a new motor for one of the trucks.
(Increase the account you used to record the purchase of the trucks because the productive life of the truck has been improved.)
Sold one-fourth of the land for $4,000 to Pablo Development Corporation, which signed a six-month note.
Stockholder Helen Bailey paid $27,600 cash for a vacant lot (land) in Canada for her personal use.
Required:
1. Set up appropriate T-accounts with beginning balances of zero for Cash, Short-Term Notes Receivable, Land, Equipment, Short-Term Notes Payable, Long-Term Notes Payable, Common Stock, and Additional Paid-in Capital. Using the T-accounts, record the effects of transactions (a) through (f) by Bailey Delivery Company.
2. Prepare a trial balance at December 31, 2018.
3. Prepare a classified balance sheet for Bailey Delivery Company at December 31, 2018.
4. At the end of the next two years, Bailey Delivery Company reported the following amounts on its balance sheets:
December 31, 2019 December 31, 2020
Current Assets $ 52,000 $47,000
Long-Term Assets 38000 73000
Total Assets 90000 120000
Short-Term Notes Payable 23000 40000
Long term notes payable 17000 20000
Total Liabilities 40000 60000
Stockholder's equity 50000 60000
Compute the company’s current ratio for 2018, 2019, and 2020. What is the trend and what does this suggest about the company?
5. At the beginning of year 2021, Bailey Delivery Company applied to your bank for a $50,000 short-term 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 current ratio. What recommendation would you make to the bank’s vice president about lending the money to Bailey Delivery Company?