This problem demonstrates the effects of transactions on the current ratio and the debt ratio of Hartford Company. Hartford’s condensed and adapted balance sheet at December 31, 2010, follows.

(In millions)

Total current assets ....................................................... $15.6

Properties, plant, equipment, and other assets............... 16.1

$31.7

Total current liabilities.................................................. $ 9.6

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

Total stockholders equity............................................. 16.3

$31.7

Assume that during the first quarter of the following year, 2011, Hartford completed the following transactions:

a. Paid half the current liabilities.

b. Borrowed $6.0 million on long-term debt.

c. Earned revenue, $2.5 million, on account.

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 $1.5 million and signing a long-term note payable for $2.7 million.

g. Recorded depreciation expense of $0.8 million.

Requirements

1. Compute Hartford’s current ratio and debt ratio at December 31, 2010. Round to two decimal places.

2. Consider each transaction separately. Compute Hartford’s current ratio and debt ratio after each transaction during 2011, 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 it is for Hartford, 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.