Massimo Company has been operating for one year (2013). You are a member of the management team investigating expansion ideas, all of which will require borrowing funds from banks. At the start of 2014, Massimo’s T-account balances were as follows:

Required:

1. Using the data from these T-accounts, complete the accounting equation on January 1, 2014:

Assets $_____ 5 Liabilities $_____ 1 Shareholders’ Equity $_____

2. Enter in the T-accounts the following transactions that occurred in 2014:

a. Paid one-half of the principal on the long-term note payable.

b. Sold $ 1,000 of the investments for $ 1,000 cash.

c. Sold one-half of the property and equipment for $ 1,250 cash.

d. Borrowed $ 2,000 from the bank and signed a note promising to pay the principal and interest at an annual rate of 5 percent in three years.

e. Paid $ 500 in dividends to shareholders.

3. Compute ending balances in the T-accounts to complete the statement of financial position on December 31, 2014:

Assets $_____ 5 Liabilities $_____ 1 Shareholders’ Equity $_____

4. Using the ending balances in the T-accounts, prepare a classified statement of financial position at December 31, 2014, in good form.

5. Calculate the current ratio at December 31, 2014.

If the industry average for the current ratio is 1.50, what does your computation suggest to you about Massimo Company? Would you support expansion by borrowing? Why or why not?