Question

Jack Hammer Company completed the following transactions. The annual accounting period ends December 31. Apr. 30 Received $816,000 from Commerce Bank after signing a 12-month, 6.00 percent, promissory note. June 6 Purchased merchandise on account at a cost of $93,000. (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 $33,000. Dec. 31 Determined salary and wages of $58,000 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: For each listed transaction and related adjusting entry, indicate the accounts, amounts, and effects on the accounting equation. 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

Answer:

Effects on Accounting Equation: Assets = Liabilities + Equity

April 30 - Assets (Cash at bank) are increased and Liabilities (Notes Payable) are increased with $814,000.

June 30 - Assets (Inventory) are increased and Liabilities (Accounts Payable) are increased with $93,000.

July 15 - Assets (Cash) are decreased and Liabilities (Accounts Payable) are decreased with $93,000.

August 31 - Assets (Cash) are increased and Liabilities (Deferred Revenue) are increased by $33,000 for security service received in advance.

Dec 31 - Liabilities (Wages Unpaid) are increased and Equity (Retained Earnings) is decreased by $58,000 for unpaid wages.

Dec 31 - Liabilities (Interests Accrued) are increased and Equity (Retained Earnings) is decreased by $32,640 for accrued interests for 8 months.

Dec 31 - Liabilities (Deferred Revenue) are reduced and Equity (Retained Earnings) is increased by $22,000 for 4/6 months security service revenue received in advance and now adjusted based on the accruals concept.

Explanation:

Effect on Debt-to-Assets Ratio:

a) no change as assets and liabilities are increased by the same amount.

b) no change as assets and liabilities are increased by the same amount.

c) no change as assets and liabilities are decreased by the same amount.

d) no change as assets and liabilities are increased by the same amount.

e) debt-to-asset ratio is increased with unpaid wages.

f) debt-to-asset ratio is increased with accrued interests at 6% of $816,000 x 8/12 = $32,640.  The note was collected on April 30 with 8 months to year-end.

g) debt-to-asset ratio is decreased with the adjustment of security service received for 4 months out of 6 months based on the accruals concept.