Question

Bryant Company sells a wide range of inventories, which are initially purchased on account. Occasionally, a short- term note payable is used to obtain cash for current use The following transactions were selected from those occurring during the year
A. On January 10, purchased merchandise on credit for $30,000. The company uses a perpetual inventory system.
B. On March 1, borrowed $64,000 cash from City Bank and signed a promissory note with a face amount of $64,000, due at the end of six months, accruing interest at an annual rate of 8.50 percent, payable at maturity.
Required:
1. For each of the transactions, indicate the accounts, amounts, and effects on the accounting equation.
2. What amount of cash is paid on the maturity date of the note?
3. Indicate the impact of each transaction (increase, decrease, and NE for no effect) on the debt-to-assets ratio, Assume Bryant Company had $300,000 in total liabilities and 500,000 in total assets, yielding a debt-to-assets ratio of 0.60, prior to each transaction.

Answer 1

Answer:

1. Finance charge = $2,720

2. Amount of cash paid = $66,720

3. Debt to Assets Ratio on January 10 is 0.62; and the impact is an increase from 0.60. Aiso, Debt to Assets Ratio on March 1 is 0.67; and the impact is an increase from 0.62.

Explanation:

1. For each of the transactions, indicate the accounts, amounts, and effects on the accounting equation.

Note: See part 1 of the attached excel file for the requirements of this question.

In the attached excel file, the amount of -$2,720 that appears under the  Stockholder's Equity is the finance charge calculated as follows:

Finance charge = Amount borrowed * Interest rate * (Number of months to the promissory note due date / Number of months in a year) = $64,000 * 8.50% * (6 / 12) = $2,720

2. What amount of cash is paid on the maturity date of the note?

Note: See part 2 of the attached excel file for the calculation of the amount of cash is paid on the maturity date of the note.

From the attached excel file, we have:

Amount of cash paid = $66,720

3. Indicate the impact of each transaction (increase, decrease, and NE for no effect) on the debt-to-assets ratio, Assume Bryant Company had $300,000 in total liabilities and 500,000 in total assets, yielding a debt-to-assets ratio of 0.60, prior to each transaction.

Note: See part 3 of the attached excel file for the debt-to-assets ratios and the indication of impacts.

From the attached excel file, we have:

Debt to Assets Ratio on January 10 is 0.62; and the impact is an increase from 0.60.

Debt to Assets Ratio on March 1 is 0.67; and the impact is an increase from 0.62.

Download xlsx