Problem 13-1A  Effect of Transactions on Debt-to-Equity Ratio

 

(Note: Consider completing Problem 13-2A after this problem to ensure that you obtain a clear understanding of the effect of various transactions on this measure of solvency.) The following account balances are taken from the records of Monet’s Garden Inc.:

 

Current liabilities                             $150,000

 

Long-term liabilities                          375,000

 

Stockholders’ equity                           400,000

 

 

 

(Continued )

 

LO5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required

 

1.        Use the information provided to compute Monet’s debt-to-equity ratio (round to three deci- mal points).

 

2.        Determine the effect that each of the following transactions will have on Monet’s debt-to- equity ratio by recalculating the ratio and then indicating whether the ratio is increased, decreased, or not affected by the transaction. (Round to three decimal points.) Consider each transaction independently; that is, assume that it is the only transaction that takes place.

 

 

 

 

 

Transaction

 

a.      Purchased  inventory on  account, $20,000

 

b.      Purchased inventory for cash, $15,000

 

c.      Paid suppliers on account,   $30,000

 

d.      Received cash on account, $40,000

 

e.      Paid insurance for next year,  $20,000

 

f.       Made sales on account, $60,000

 

g.      Repaid short-term loans at bank,  $25,000

 

h.      Borrowed $40,000 at bank for 90   days

 

i.       Declared and paid $45,000 cash dividend

 

j.       Purchased  $20,000  of  short-term investments

 

k.      Paid $30,000 in  salaries

 

l.       Accrued additional $15,000 in  taxes

 

Effect of Transaction on Debt-to Equity Ratio