Question

Question: 1. Compute Northtown's current​ ratio, debt​ ratio, and earnings per share. Round all ratios to ...

1.	Compute Northtown's current​ ratio, debt​ ratio, and earnings per share. Round all ratios to two decimal places.
2.	Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately.
	a.	Borrowed $105,000 on a​ long-term note payable.
	b.	On January​ 1, Issued $30,000 shares of common​ stock, receiving cash of $367,000.
	c.	Paid​ short-term notes​ payable $24,000.
	d.	Purchased merchandise of $45,000 on​ account, debiting Inventory.
	e.	Received cash on​ account $23,000.

Cash………………………………………. $ 21,000       Accounts Payable……………. $ 100,000

Short-term investments………………….    33,000 Accrued liabilities……………….. 31,000

Accounts receivable, net………………..    86,000 Long-term notes payable……… 166,000

Inventories………………………………. 144,000 Other long-term liabilities…….. 31,000

Prepaid expenses………………………       3,000 Net income…………………..     94,000

Total assets……………………………..    672,000 Number of common

Short-term notes payable……………..      45,000 shares outstanding…………. 48,000

Requirement 1. Compute

Northtown'sNorthtown's

current​ ratio, debt​ ratio, and earnings per share. Round all ratios to two decimal places.

Start by determining the formula for each​ ratio, beginning with the current​ ratio, followed by the debt​ ratio, and then earnings per share.

/

=

Current ratio

/

=

Debt ratio

(

-

) /

=

Earnings per share

Now compute

Northtown'sNorthtown's

current​ ratio, debt​ ratio, and earnings per share. ​(Round all ratios to two decimal​ places.)

	Current ratio	Debt ratio	Earnings per share

Requirement 2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction

separately.

​(Round all ratios to two decimal​ places.)

	Current ratio	Debt ratio	Earnings per share
a.

b.

c.

d.

e.

Answer 1

1	Current ratio=Current assets/Current liabilities
	Current assets:
	Cash			21000
	Short-term investments			33000
	Accounts receivable, net			86000
	Inventories			144000
	Prepaid expenses			3000
	Total			287000
	Current liabilities:
	Short-term notes payable			45000
	Accounts Payable			100000
	Accrued liabilities			31000
	Total			176000
	Current ratio=287000/176000=1.63
	Debt ratio=Total debt/Total assets
	Total debt:
	Long-term notes payable			166000
	Other long-term liabilities			31000
	Total			197000
	Debt ratio=197000/672000=0.29
	Earnings per share=Net income/Number of common shares outstanding=94000/48000=$ 1.96 per share
2
(a)	Borrowing of long-term notes-Cash increases by $105000 and Long-term notes payable increase by $105000
	Current ratio=Current assets/Current liabilities
	Current assets:
	Cash	(21000+105000)		126000
	Short-term investments			33000
	Accounts receivable, net			86000
	Inventories			144000
	Prepaid expenses			3000
	Total			392000
	Current liabilities:
	Short-term notes payable			45000
	Accounts Payable			100000
	Accrued liabilities			31000
	Total			176000
	Current ratio=392000/176000=2.23
	Debt ratio=Total debt/Total assets
	Total debt:
	Long-term notes payable			271000
	(166000+105000)
	Other long-term liabilities			31000
	Total			302000
	Debt ratio=302000/672000=0.45
	No change in earnings per share
(b)	Issue of common stock-Cash will increase by $367000 and Common stock will increase by $367000
	Number of common shares outstanding will increase by 30000 shares
	Current ratio=Current assets/Current liabilities
	Current assets:
	Cash	(21000+367000)		388000
	Short-term investments			33000
	Accounts receivable, net			86000
	Inventories			144000
	Prepaid expenses			3000
	Total			654000
	Current liabilities:
	Short-term notes payable			45000
	Accounts Payable			100000
	Accrued liabilities			31000
	Total			176000
	Current ratio=654000/176000=3.72
	No change in debt ratio
	Earnings per share=Net income/Number of common shares outstanding=94000/48000=$ 1.96 per share
©	Paid short term notes-Cash decreases by 24000 and Decreases short-term notes payable by 24000
	Current ratio=Current assets/Current liabilities
	Current assets:
	Cash	(21000-24000)		-3000
	Short-term investments			33000
	Accounts receivable, net			86000
	Inventories			144000
	Prepaid expenses			3000
	Total			263000
	Current liabilities:
	Short-term notes payable			21000
	(45000-24000)
	Accounts Payable			100000
	Accrued liabilities			31000
	Total			152000
	Current ratio=263000/152000=1.73
	No change in debt ratio and earnings per share
(d)	Purchased merchandise account-Inventory increased by 45000 and increase accounts payable by 45000
	Current ratio=Current assets/Current liabilities
	Current assets:
	Cash			21000
	Short-term investments			33000
	Accounts receivable, net			86000
	Inventories (144000+45000)			189000
	Prepaid expenses			3000
	Total			332000
	Current liabilities:
	Short-term notes payable			45000
	Accounts Payable (100000+45000)			145000
	Accrued liabilities			31000
	Total			221000
	Current ratio=332000/221000=1.50
	No change in debt ratio and earnings per share
€	Received cash on account-Increase cash by 23000 and Decrease accounts receivable by 23000
	Current assets:
	Cash	(21000-23000)		-2000
	Short-term investments			33000
	Accounts receivable, net
	(86000-23000)			63000
	Inventories			144000
	Prepaid expenses			3000
	Total			241000
	Current liabilities:
	Short-term notes payable			45000
	Accounts Payable			100000
	Accrued liabilities			31000
	Total			176000
	Current ratio=241000/176000=1.37
	No change in debt ratio and earnings per share
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