Massimo Company has been operating for one year (2010). You are a member of the management team investigating expansion ideas that will require borrowing funds from banks. At the start of 2011, Massimo€™s T-account balances were as follows:

Required:
1. Using the data from these T-accounts, determine the amounts for the following on January 1, 2011:
Assets $ ______ = Liabilities $ ______ + Stockholders€™ Equity $ ______
2. Enter the following 2011 transactions in the T-accounts:
a. Borrowed $2,000 from a local bank, signing a note due in three years.
b. Sold $1,000 of the investments for $1,000 cash.
c. Sold one-half of the property and equipment for $1,250 in cash.
d. Paid $300 cash dividends to stockholders.
3. Compute ending balances in the T-accounts to determine amounts for the following on December 31, 2011:
Assets $ ______ = Liabilities $ ______ + Stockholders€™ Equity $ ______
4. Calculate the financial leverage ratio at December 31, 2011. If the industry average for the financial leverage ratio is 2.00, what does your computation suggest to you about Massimo Company? Would you support expansion by borrowing? Why or whynot?

Assets: Cash Short-Term Investments Property and Equipment 3,000 2,000 2,500 Liabilities: Short-Term Notes Payable Long-Term Notes Payable 200 300 Stockholders' Equity Contributed Capital Retained Earnings 5,000 2,000