Question

This problem demonstrates the effects of transactions on the current ratio and the debt ratio of Cole Company. Cole’s condensed and adapted balance sheet at December 31, 2013, follows:
(In millions)
Total current assets....................................................... $15.4
Properties, plant, equipment, and other assets............... 15.8
$31.2
Total current liabilities.................................................. $ 9.4
Total long-term liabilities.............................................. 5.5
Total shareholders’ equity............................................. 16.3
$31.2
Assume that during the first quarter of the following year, 2014, Cole completed the following transactions:
a. Earned revenue of $2.4 million, on account.
b. Borrowed $3.0 million on long-term debt.
c. Paid half of the current liabilities.
d. Paid selling expense of $0.6 million.
e. Accrued general expense of $0.3 million. Credit General Expense Payable, a current liability.
f. Purchased equipment for $4.9 million, paying cash of $2.0 million and signing a long-term note payable for $2.9 million.
g. Recorded depreciation expense of $0.9 million.

Requirements
1. Compute Cole’s current ratio and debt ratio at December 31, 2013. Round to two decimal places.
2. Consider each transaction separately. Compute Cole’s current ratio and debt ratio after each transaction during 2014—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.
d. Expenses usually ___________ the debt ratio.
e. If a company’s current ratio is greater than 1.0, as for Cole, paying of a current liability will always ___________ the current ratio.
f. Borrowing money on long-term debt will always ___________ the current ratio and ___________ the debt ratio.



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  • CreatedJuly 25, 2014
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