Exercise 9-21 Complete the accounting cycle using long-term liability transactions (LO9-2, 9-8)

[The following information applies to the questions displayed below.] On January 1, 2021, the general ledger of Freedom Fireworks includes the following account balances:

Accounts	Debit				Credit
Cash	$	11,200
Accounts Receivable		34,000
Allowance for Uncollectible Accounts					$	1,800
Inventory		152,000
Land		67,300
Buildings		120,000
Accumulated Depreciation						9,600
Accounts Payable						17,700
Common Stock						200,000
Retained Earnings						155,400
Totals	$	384,500			$	384,500

During January 2021, the following transactions occur:

January 1		Borrow $100,000 from Captive Credit Corporation. The installment note bears interest at 7% annually and matures in 5 years. Payments of $1,980 are required at the end of each month for 60 months.
January 4		Receive $31,000 from customers on accounts receivable.
January 10		Pay cash on accounts payable, $11,000.
January 15		Pay cash for salaries, $28,900.
January 30		Firework sales for the month total $195,000. Sales include $65,000 for cash and $130,000 on account. The cost of the units sold is $112,500.
January 31		Pay the first monthly installment of $1,980 related to the $100,000 borrowed on January 1. Round your interest calculation to the nearest dollar.

Exercise 9-21 Part 7

7. Analyze the following for Freedom Fireworks:

Requirement 1: a-1. Calculate the debt to equity ratio.

a-2. If the average debt to equity ratio for the industry is 1.0, is Freedom Fireworks more or less leveraged than other companies in the same industry?

• Less leveraged

• More leveraged

Requirement 2: b-1. Calculate the times interest earned ratio.

b-2. If the average times interest earned ratio for the industry is 20 times, is the company more or less able to meet interest payments than other companies in the same industry?

• More able to meet interest

• Less able to meet interest

Requirement 3: c. Based on the ratios calculated in (a) and (b), would Freedom Fireworks be more likely to receive a higher or lower interest rate than the average borrowing rate in the industry?

• Lower interest rate

• Higher interest rate