Question

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

Apr.		30		Received $804,000 from Commerce Bank after signing a 12-month, 5.50 percent, promissory note.
June		6		Purchased merchandise on account at a cost of $92,000. (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 $32,500.
Dec.		31		Determined salary and wages of $57,000 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

Apr.

30

Received $804,000 from Commerce Bank after signing a 12-month, 5.50 percent, promissory note.

Indicate the accounts:- Cash, Promissory note payable

Amounts:- $804,000

Effects on the accounting equation:- Assets = Liabilities + Equity, so Asset(Cash) and Liability(Promisory note) will be increase for stated amount.

debt-to-assets ratio:- Will Increase as Assets and Debt increases.

June

6

Purchased merchandise on account at a cost of $92,000. (Assume a perpetual inventory system.)

Indicate the accounts:- Accounts payable, Inventory

Amounts:- $92,000

Effects on the accounting equation:- Assets = Liabilities + Equity, so Asset(Inventory) and Liability(Accounts payable) will be increase for stated amount.

debt-to-assets ratio:-Will Increase as Assets and Debt increases.

July

15

Paid for the June 6 purchase.

Indicate the accounts:- Accounts payable, Cash

Amounts:- $92,000

Effects on the accounting equation:- Assets = Liabilities + Equity, so Asset(Cash) and Liability(Accounts payable) will be decrease for stated amount.

debt-to-assets ratio:- Will Decrease as Assets and Debt increases.

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 $32,500.

Indicate the accounts:- Customer Advance, Cash

Amounts:- $32,500

Effects on the accounting equation:- Assets = Liabilities + Equity, so Asset(Cash) and Liability (Customer advance) will be Increase for stated amount.

debt-to-assets ratio:- Will Increase as Assets increases.

Dec.

31

Determined salary and wages of $57,000 were earned but not yet paid as of December 31

Indicate the accounts:- Salary expense, Salary payable

Amounts:- $57,000

Effects on the accounting equation:- Assets = Liabilities + Equity, so Equity(Salary expense) will be decreased and Liability (Salary payable) will be Increased for stated amount.

debt-to-assets ratio:- Will not effect

Dec.

31

Adjusted the accounts at year-end, relating to interest.

Indicate the accounts:- Interest expense, Interest payable

Amounts:- $804,000 x 5.5% x 8 months = $29,480

Effects on the accounting equation:- Assets = Liabilities + Equity, so Equity(Interest expense) will be decreased and Liability (Interest payable) will be Increased for stated amount.

debt-to-assets ratio:- Will not effect

Dec.

31

Adjusted the accounts at year-end, relating to security service.

Indicate the accounts:- Deffered revenue, Revenue, Customer advance

Amounts:- Deffered revenue = 10,833, Revenue = $21,667 Customer advance = $32,500

Effects on the accounting equation:- Assets = Liabilities + Equity, so Equity(Deffered revenue) will be decreased, Equity(Revenue) will be increased and Liability (Customer advances) will be decreased for stated amount.

debt-to-assets ratio:- Will not effect