Question

EZ Curb Company completed the following transactions. The annual accounting period ends December 31.

Jan. 8	Purchased merchandise on account at a cost of $20,000. (Assume a perpetual inventory system.)
17	Paid for the January 8 purchase.
Apr. 1	Received $49,600 from National Bank after signing a 12-month, 12.0 percent, promissory note.
June 3	Purchased merchandise on account at a cost of $24,000.
July 5	Paid for the June 3 purchase.
Aug. 1	Rented out a small office in a building owned by EZ Curb Company and collected six months’ rent in advance, amounting to $9,600. (Use an account called Unearned Revenue.)
Dec. 20	Collected $220 cash on account from a customer.
Dec. 31	Determined that wages of $8,900 were earned but not yet paid on 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 rent.

Required:

2. For each transaction and related adjusting entry, indicate whether the debt-to-assets ratio is increased or decreased or there is no change. (Assume EZ Curb Company’s debt-to-assets ratio has always been less than 1.0.) (Enter your answers in transaction order provided in the problem statement.)

Answer 1

		Impact on Debt To assets ratio
Jan. 8	Purchased merchandise on account at a cost of $20,000. (Assume a perpetual inventory system.)	Increased
Jan. 17	Paid for the January 8 purchase.	Decreased
Apr. 1	Received $49,600 from National Bank after signing a 12-month, 12.0 percent, promissory note.	Increased
June 3	Purchased merchandise on account at a cost of $24,000.	Increased
July 5	Paid for the June 3 purchase.	Decreased
Aug. 1	Rented out a small office in a building owned by EZ Curb Company and collected six months’ rent in advance, amounting to $9,600. (Use an account called Unearned Revenue.)	Increased
Dec. 20	Collected $220 cash on account from a customer.	No change
Dec. 31	Determined that wages of $8,900 were earned but not yet paid on December 31 (Ignore payroll taxes).	Increased
Dec. 31	Adjusted the accounts at year-end, relating to interest.	Increased
Dec. 31	Adjusted the accounts at year-end, relating to rent.	Decreased

Journal entries
Date		General Journal	Debit	Credit
Jan. 8		Inventory	20,000
		Account payable		20,000
		(To record purchase of inventory on account.)
Jan. 17		Account payable	20,000
		Cash		20,000
		(To record payment made to account payable.)
Apr. 1		Cash	49,600
		Notes payable		49,600
		(To record Borrowed cash through sinning notes payable.)
June 3		Inventory	20,000
		Account payable		20,000
		(To record purchase of inventory on account.)
July 5		Account payable	20,000
		Cash		20,000
		(To record payment made to account payable.)
Aug. 1		Cash	9,600
		Unearned revenue		9,600
		(To record cash received in advance from renting a building.)
Dec. 20		Cash	220
		Account receivable		220
		(To record cash collected from account receivable.)
Adjustment entries
Date	General Journal		Debit	Credit
	Salaries and wages expense		8,900
	Salaries and wages payable			8,900
	(To record salaries and wages expense this paid in future.)
	Interest expense		4,464
	Interest payable			4,464
	(To record accrued interest expense.) (49600*12%*9/12) (Apr to Dec = 9 months)
	Unearned Revenue		8,000
	Rent revenue			8,000
	(To record rent revenue.) (Aug To Dec = 5 months) (9600*5/6)