This problem demonstrates the effects of transactions on the current ratio and the debt ratio of Digger

Question:

This problem demonstrates the effects of transactions on the current ratio and the debt ratio of Digger Company. Digger's condensed and adapted balance sheet at December 31, 2015, follows:

(In millions)

Total current assets.................................................................$15.2

Properties, plant, equipment, and other assets.................................. 15.8

$31.0

Total current liabilities............................................................. $ 8.6

Total long-term liabilities......................................................... 5.8

Total shareholders'equity......................................................... 16.6

$31.0

Assume that during the first quarter of the following year, 2016, Digger completed the follow¬ing transactions:

a. Earned revenue of $2.7 million, on account.

b. Borrowed $7.0 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 $0.7 million. Credit General Expense Payable, a current liability.

f. Purchased equipment for $4.2 million, paying cash of $1.7 million and signing a long-term note payable for $2.5 million.

g. Recorded depreciation expense of $0.3 million.

Requirements

1. Compute Digger's current ratio and debt ratio at December 31, 2015. Round to two decimal places.

2. Consider each transaction separately. Compute Digger's current ratio and debt ratio after each transaction during 2016-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 Digger, 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.

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...