Question: This problem demonstrates the effects of
This problem demonstrates the effects of transactions on the current ratio and the debt ratio of Hillsboro Company. Hillsboros condensed and adapted balance sheet at December 31, 2009, follows.
Assume that during the first quarter of the following year 2010, Hillsboro completed the following transactions:
a. Paid half of the current liabilities.
b. Borrowed $7.0 million on long-term debt.
c. Earned revenue of $2.5 million, on account.
d. Paid selling expense of $3.0 million.
e. Accrued general expense of $0.7 million. Credit General Expense Payable, a current liability. f. Purchased equipment for $4.7 million, paying cash of $1.9 million and signing a longterm note payable for $2.8 million.
g. Recorded depreciation expense of $0.6 million.
Requirements
1. Compute Hillsboros current ratio and debt ratio at December 31, 2009. Round to two decimal places.
2. Consider each transaction separately. Compute Hillsboros current ratio and debt ratio after each transaction during 2010, that is, seven times. Round ratios to two decimal places.
3. Based on your analysis, you should be able to readily identify the effects of certain transactions on the current ratio and the debt ratio. Test your understanding by completing these statements with either increase or decrease.
a. Revenues usually the current ratio.
b. Revenues usually the debt ratio.
c. Expenses usually the current ratio. (Note: depreciation is an exception to this rule.)
d. Expenses usually the debt ratio.
e. If a company’s current ratio is greater than 1.0, as for Hillsboro, paying off a current liability will always the current ratio.
f. Borrowing money on long-term debt will always the current ratio and the debt ratio.
Transcribed Image Text:
(In millions) Total current assets $15.3 Properties, plant, equipment, and other assets. 16.4 $31.7 Total current liabilities. $ 8.6 Total long-term liabilities. Total shareholders' equity. 5.4 17.7 $31,7
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