Lee Delivery Company Inc. was organized at the beginning of 2014. The following transactions occurred during 2014 (the company€™s first year of operations):

a. Received $40,000 cash from the organizers in exchange for shares in the new company.

b. Purchased land for $16,000 and signed a one-year note (at a 6 percent annual interest rate).

c. Bought two used delivery trucks for operating purposes at the start of the year at a cost of $ 10,000 each; paid $ 5,000 cash and signed a promissory note for the balance, payable over the next three years (at an annual interest rate of 7 percent).

d. Sold one- fourth of the land for $ 4,000 to Birkins Moving, which promised to pay in six months.

e. Paid $ 2,000 cash to a truck repair shop for a new motor for one of the trucks. ( Hint: Increase the account you used to record the purchase of the trucks since the usefulness of the truck has been improved.)

f. Traded the other truck and $ 6,000 cash for a new one. The old truck€™s fair value is $ 10,000.

g. Shareholder Jonah Lee paid $ 27,500 cash for a vacant lot (land) for his personal use.

h. Collected the amount of the note due from Birkins Moving in (d).

i. Paid one- third of the principal of the note due for the delivery trucks in (c).

Required:

1. Set up appropriate T- accounts with beginning balances of $ 0 for Cash, Short- term notes receivable, Land, Equipment, Short- term notes payable, Long- term notes payable, and contributed capital. Using the T- accounts, record the effects of these transactions on Lee Delivery Company.

2. Prepare a classified statement of financial position for Lee Delivery Company at the end of 2014. Compute the current ratio at that date.

3. At the end of the next two years, Lee Delivery Company reported the following amounts on its statements of financial position:

Compute the company€™s current ratio for 2014, 2015, and 2016. What is the trend and what does this suggest about the company?
4. At the beginning of 2017, Lee 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 Lee Delivery Company?

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December 31.2015 $52,000 38,000 90,000 23,000 17,000 40,000 50,000 December 31, 2016 Current assets Non-current assets Total assets Short-term notes payable Long-term notes payable Total liabilities Shareholders' equity $ 47,000 73,000 120,000 40,000 20,000 60,000 60,000