Santana Rey created Business Solutions on October $1, 2019$. The company has been successful, and Santana plans to expand her business. She believes that an additional $\$86,000$ is needed and is investigating three funding sources.

a. Santana’s sister Cicely is willing to invest $\$86,000$ in the business as a common shareholder. Because Santana currently has about $\$129,000$ invested in the business, Cicely’s investment will mean that Santana will maintain about $60\%$ ownership and Cicely will have $40\%$ ownership of Business Solutions.

b. Santana’s uncle Marcello is willing to invest $\$86,000$ in the business as a preferred shareholder. Marcello would purchase $860$ shares of $\$100$ par value, $7\%$ preferred stock.

c. Santana’s banker is willing to lend her $\$86,000$ on a $7\%$, $10$-year note payable. She would make monthly payments of $\$1,000$ per month for $10$ years.

Required

1. Prepare the journal entry to reflect the initial $\$86,000$ investment under each of the options $(a), (b)$, and $(c)$.

2. Evaluate the three proposals for expansion, providing the pros and cons of each option.

3. Which option do you recommend Santana adopt? Explain.

Santana Rey created Business Solutions on October 1, 2017. The company has been successful, and its list of customers has grown. To accommodate the growth, the accounting system is modified to set up separate accounts for each customer. The following chart of accounts includes the account number used for each account and any balance as of December 31, 2017. Santana Rey decided to add a fourth digit with a decimal point to the 106 account number that had been used for the single Accounts Receivable account. This change allows the company to continue using the existing chart of accounts.

In response to requests from customers, S. Rey will begin selling computer software. The company will extend credit terms of 1/10, n/30, FOB shipping point, to all customers who purchase this merchandise. However, no cash discount is available on consulting fees. Additional accounts (Nos. 119, 413, 414, 415, and 502) are added to its general ledger to accommodate the company's new merchandising activities. Also, Business Solutions does not use reversing entries and, therefore, all revenue and expense accounts have zero beginning balances as of January 1, 2018. Its transactions for January through March follow:

Jan. 4 The company paid cash to Lyn Addie for five days' work at the rate of $125 per day. Four of the five days relate to wages payable that were accrued in the prior year.
 5 Santana Rey invested an additional$25,000 cash in the company.
 7 The company purchased $5,800 of merchandise from Kansas Corp. with terms of 1/10, n/30, FOB shipping point, invoice dated January 7.
 9 The company received$2,668 cash from Gomez Co. as full payment on its account.
 11 The company completed a five-day project for Alex's Engineering Co. and billed it $5,500, which is the total price of$7,000 less the advance payment of $1,500.
 13 The company sold merchandise with a retail value of$5,200 and a cost of $3,560 to Liu Corp., invoice dated January 13.
 15 The company paid$600 cash for freight charges on the merchandise purchased on January 7.
 16 The company received $4,000 cash from Delta Co. for computer services provided.
 17 The company paid Kansas Corp. for the invoice dated January 7, net of the discount.
 20 Liu Corp. returned$500 of defective merchandise from its invoice dated January 13. The returned merchandise, which had a $320 cost, is discarded. (The policy of Business Solutions is to leave the cost of defective products in Cost of Goods Sold.)
 22 The company received the balance due from Liu Corp., net of both the discount and the credit for the returned merchandise.
 24 The company returned defective merchandise to Kansas Corp. and accepted a credit against future purchases. The defective merchandise invoice cost, net of the discount, was$496.
 26 The company purchased $9,000 of merchandise from Kansas Corp. with terms of 1/10, n/30, FOB destination, invoice dated January 26.
 26 The company sold merchandise with a$4,640 cost for $5,800 on credit to KC, Inc., invoice dated January 26.
 31 The company paid cash to Lyn Addie for 10 days' work at$125 per day.

Feb. 1 The company paid $2,475 cash to Hillside Mall for another three months' rent in advance.
 3 The company paid Kansas Corp. for the balance due, net of the cash discount, less the$496 amount in the credit memorandum.
 5 The company paid $600 cash to the local newspaper for an advertising insert in today's paper.
 11 The company received the balance due from Alex's Engineering Co. for fees billed on January 11.
 15 Santana Rey withdrew$4,800 cash from the company for personal use.
 23 The company sold merchandise with a $2,660 cost for$3,220 on credit to Delta Co., invoice dated February 23.
 26 The company paid cash to Lyn Addic for eight days' work at $125 per day.
 27 The company reimbursed Santana Rey for business automobile mileage (600 miles at$0.32 per mile).

Mar. 8 The company purchased $2,730 of computer supplies from Harris Office Products on credit, invoice dated March 8.
 9 The company received the balance due from Delta Co. for merchandise sold on February 23.
 11 The company paid$960 cash for minor repairs to the company's computer.
 16 The company received $5,260 cash from Dream, Inc., for computing services provided.
 19 The company paid the full amount due to Harris Office Products, consisting of amounts created on December 15 (of$1,100) and March 8.
 24 The company billed Easy Leasing for $9,047 of computing services provided.
 25 The company sold merchandise with a$2,002 cost for $2,800 on credit to Wildcat Services, invoice dated March 25.
 30 The company sold merchandise with a$1,048 cost for $2,220 on credit to IFM Company, invoice dated March 30.
 31 The company reimbursed Santana Rey for business automobile mileage (400 miles at$0.32 per mile).

The following additional facts are available for preparing adjustments on March 31 prior to financial statement preparation:
a. The March 31 amount of computer supplies still available totals $2,005.
b. Three more months have expired since the company purchased its annual insurance policy at a$2,220 cost for 12 months of coverage.
c. Lyn Addie has not been paid for seven days of work at the rate of $125 per day.
d. Three months have passed since any prepaid rent has been transferred to expense. The monthly rent expense is$825.
e. Depreciation on the computer equipment for January 1 through March 31 is $1,250.
f. Depreciation on the office equipment for January 1 through March 31 is$400.
g. The March 31 amount of merchandise inventory still available totals $704.

Required
1. Prepare journal entries to record each of the January through March transactions.
2. Post the journal entries in part 1 to the accounts in the company's general ledger. (Note: Begin with the ledger's post-closing adjusted balances as of December 31, 2017.)
3. Prepare a partial work sheet consisting of the first six columns (similar to the one shown in Exhibit 5B.1) that includes the unadjusted trial balance, the March 31 adjustments (a) through (g), and the adjusted trial balance. Do not prepare closing entries and do not journalize the adjustments or post them to the ledger.
4. Prepare an income statement (from the adjusted trial balance in part 3) for the three months ended March 31, 2018. Use a single-step format. List all expenses without differentiating between selling expenses and general and administrative expenses.
5. Prepare a statement of owner's equity (from the adjusted trial balance in part 3) for the three months ended March 31, 2018.
6. Prepare a classified balance sheet (from the adjusted trial balance) as of March 31, 2018.

Santana Rey has consulted with her local banker and is considering financing an expansion of her business by obtaining a long-term bank loan. Selected account balances at March 31, 2021, for Business Solutions follow.

Total assets . . . . . . . . 120,268

Total liabilities . . . . . . . . $875

Total equity . . . . . . . .$119,393

1. The bank has offered a long-term secured note to Business Solutions. The bank's loan procedures require that a client's debt-to-equity ratio not exceed 0.8. As of March 31, 2021, what is the maximum amount that Business Solutions could borrow from this bank?

2. If Business Solutions borrows the maximum amount allowed from the bank, what percentage of assets would be financed

(a) by debt and

(b) by equity?

3. What are some factors Santana Rey should consider before borrowing the funds?