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, 2016, follows:
(In millions)
Total current assets............................................................ $15.4
Properties, plant, equipment, and other assets............................. 16.0
S3 1.4
Total current liabilities........................................................ $ 8.6
Total long-term liabilities.................................................... 5.8
Total stockholders'equity..................................................... 17.0
$31.4
Assume that during the first quarter of the following year, 2017, Hartford completed the following transactions:
a. Earned revenue, $2.5 million, on account.
b. Borrowed $3.0 million on long-term debt.
c. Paid half the current liabilities.
d. Paid selling expense of $3.0 million.
e. Accrued general expense of $0.9 million. Credit General Expense Payable, a current liability.
f. Purchased equipment for $4.6 million, paying cash of $1.8 million, and signing a long-term note payable for $2.8 million.
g. Recorded depreciation expense of $0.9 million.
Requirements
1. Compute Hartford's current ratio and debt ratio at December 31, 2016. Round to two decimal places.
2. Consider each transaction separately. Compute Hartford's current ratio and debt ratio after each transaction during 2017-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 transac¬tions 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 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.