Question

PA10-1 Determining Financial Effects of Transactions Affecting Current Liabilities with Evaluation of Effects on the Debt-to-Assets Ratio [LO 10-2, LO 10-5]

Jack Hammer Company completed the following transactions. The annual accounting period ends December 31.

Apr.		30		Received $672,000 from Commerce Bank after signing a 12-month, 9.00 percent, promissory note.
June		6		Purchased merchandise on account at a cost of $81,000. (Assume a perpetual inventory system.)
July		15		Paid for the June 6 purchase.
Aug.		31		Signed a contract to provide security service to a small apartment complex starting in September, and collected six months’ fees in advance, amounting to $27,000.
Dec.		31		Determined salary and wages of $46,000 were earned but not yet paid as of December 31 (ignore payroll taxes).
Dec.		31		Adjusted the accounts at year-end, relating to interest.
Dec.		31		Adjusted the accounts at year-end, relating to security service.

Required:

1. For each listed transaction and related adjusting entry, indicate the accounts, amounts, and effects on the accounting equation.
2. For each item, indicate whether the debt-to-assets ratio is increased or decreased or there is no change. (Assume Jack Hammer’s debt-to-assets ratio is less than 1.0.)

Answer 1

Part 1)

Date	Assets	=	Liabilities	+	Shareholder's Equity
30th April	Cash + $672,000	=	Notes Payable + $672,000	+	NE
6th June	Inventory + $81,000	=	Accounts Payable + $81,000	+	NE
15th July	Cash - $81,000	=	Accounts Payable - $81000	+	NE
31st August	Cash + $27,000	=	Unearned Revenue + $27,000	+	NE
31st December	NE	=	Wages Payable + $46,000	+	Wage Expense - $46,000
31st December (672,000*9%*8/12)	NE	=	Interest Payable + $40320	+	Interest Expense - $40320
31st December (27,000*4/6)	NE	=	Unearned Revenue - $18,000	+	Service Revenue + $18,000

Part B)

Date	Impact
30th April	Decreased
6th June	Decreased
15th July	Increased
31st August	Decreased
31st December	Decreased
31st December	Decreased
31st December	Increased