This problem demonstrates the effects of transactions on the current ratio and the debt ratio of Hillsboro Company. Hillsboro’s condensed and adapted balance sheet at December 31, 2009, follows.

(In millions)

Total current assets ....................................................... $15.3

Properties, plant, equipment, and other assets............... 16.4

$31.7

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

Total long-term liabilities.............................................. 5.4

Total shareholders equity............................................. 17.7

$31.7

Assume that during the first quarter of the following year 2010, Hillsboro completed the following transactions:

a. Paid half of the current liabilities.

b. Borrowed $7.0 million on long-term debt.

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

d. Paid selling expense of $3.0 million.

e. Accrued general expense of $0.7 million. Credit General Expense Payable, a current liability.

f. Purchased equipment for $4.7 million, paying cash of $1.9 million and signing a long-term note payable for $2.8 million.

g. Recorded depreciation expense of $0.6 million.

Requirements

1. Compute Hillsboro’s current ratio and debt ratio at December 31, 2009. Round to two decimal places.

2. Consider each transaction separately. Compute Hillsboro’s current ratio and debt ratio after each transaction during 2010, 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 Hillsboro, 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.