Question

PB10-1 Determining Financial Effects of Transactions Affecting Current Liabilities with Evaluation of Effects on the Debt-to-Assets Ratio [LO 10-2, LO 10-5]

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

Jan. 3	Purchased merchandise on account at a cost of $34,000. (Assume a perpetual inventory system.)
Jan. 27	Paid for the January 3 purchase.
Apr. 1	Received $90,000 from Atlantic Bank after signing a 12-month, 7.0 percent promissory note.
June 13	Purchased merchandise on account at a cost of $10,000.
July 25	Paid for the June 13 purchase.
Aug. 1	Rented out a small office in a building owned by Tiger Company and collected eight months’ rent in advance amounting to $10,000. (Use an account called Unearned Rent Revenue.)
Dec. 31	Determined wages of $22,000 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:

1.

For each listed transaction and related adjusting entry, indicate the accounts, amounts, and effects on the accounting equation. (Do not round intermediate calculations. Enter any decreases to account balances with a minus sign. Enter your answers in transaction order provided in the problem statement.) 2. For each item, indicate whether the debt-to-assets ratio is increased or decreased or there is no change. (Assume Tiger Company’s debt-to-assets ratio is less than 1.0.) (Enter your answers in transaction order provided in the problem statement.)

Answer 1

					Accounting equation
Adjustment Entries		debit	credit		Assets	=	Liabilities	+	Shareholders equity			Effect on debt equity ratio
1-	Inventory	34000		1-	34000		34000					Increase
	accounts payable		34000	2-	-34000		-34000					decrease
				3-	90000		90000					Increase
2-	accounts payable	34000		4-	10000		10000					Increase
	cash		34000	5-	-10000		-10000					decrease
				6-	10000		10000					Increase
3-	cash	90000		7-			22000		-22000			Increase
	notes payable		90000	8-			-6250		6250			decrease
				9-			4725		-4725			Increase
4-	Inventory	10000
	accounts payable		10000
5-	accounts payable	10000
	cash		10000
6-	cash	10000
	unearned rent revenue		10000
7-	wages expense	22000
	wages payable		22000
8-	unearned rent revenue	6250
	rent revenue		6250
9-	interest expense	4725
	interest payable		4725