This problem demonstrates the effects of transactions on the current ratio and the debt ratio of Harrington Company. Harrington€™s condensed and adapted balance sheet at December 31, 2012, follows.

Assume that during the first quarter of the following year, 2013, Harrington completed the following transactions:
a. Paid half the current liabilities.
b. Borrowed $2.0 million on long-term debt.
c. Earned revenue, $2.4 million, on account.
d. Paid selling expense of $0.7 million.
e. Accrued general expense of $0.5 million. Credit General Expense Payable, a current liability.
f. Purchased equipment for $4.0 million, paying cash of $1.5 million and signing a longterm note payable for $2.5 million.
g. Recorded depreciation expense of $0.4 million.

Requirements
1. Compute Harrington€™s current ratio and debt ratio at December 31, 2012. Round to two decimal places.
2. Consider each transaction separately. Compute Harrington€™s current ratio and debt ratio after each transaction during 2013€”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 €œincrease€ or €œdecrease€:
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 Harrington, paying off a current liability will always _____________ the current ratio.
f. Borrowing money on long-term debt will always ___________ the current ratio and the debtratio.

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