Reference no: EM13550190

The accounting records of Schmitt 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 to enable it to pay the $65,000 cash toward the purchase. The owner withdraws $1,000 cash per month for personal use.

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.