Question

Durango Company started Year 2 with beginning balances of $1,000 cash, $500 note payable, and $400 common stock. During the year, Durango generated $400 of cash revenue and $300 of cash expenses. Durango also purchased land for $900 cash. If the note payable is due on January 1, Year 3, was it a good idea to purchase the land?

Answer 1

Answer:

If Durango can negotiate another note payable which is just receivable before the the payment due regarding the current note payable then this decision was correct decision. Furthermore, currently company has $1100 ($1000 + $400sales - $cost). After paying for the land, the residual amount is $200. All the company has to do is to arrange $700, so this could be arranged by the negotiating another note payable with the bank.

If the company is unable to arrange the loan, then it is not a good decision. The company must assess whether it is able or not to pay its debts in future before making such investments.