Question

Diego Company sells a wide range of goods through two retail stores operating in adjoining cities. Most purchases of goods for resale are on account. Occasionally, a short- term note payable is used to obtain cash for current use. The following transactions were selected from those occurring during 2015:
a. On January 10, 2015, purchased merchandise on credit, $ 36,000; the company uses a perpetual inventory system.
b. On March 1, 2015, borrowed $ 200,000 cash from the bank and signed an interest- bearing note payable at the end of one year, with an annual interest rate of 4 percent payable at maturity.
c. On April 5, 2015, sold merchandise on credit, $ 67,800; this amount included GST of $ 3,000 and PST of $ 4,800. The cost of sales represents 70 percent of the sales invoice.
Required:
1. Describe the financial statement effects of these transactions. Indicate the accounts affected and the amounts and direction of the effects (+ for increases and – for decreases) on the accounting equation. Use the following headings:
2. What amount of cash is paid on the maturity date of the note?
3. Discuss the impact of each transaction on Diego’s cash flows.
4. Discuss the impact of each transaction on the quick ratio. Assume that the quick ratio is greater than 1.0 before considering each transaction.


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  • CreatedAugust 04, 2015
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