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 $25,500. The company uses a perpetual inventory system. b. On March 1, borrowed $55,000 cash from City Bank and signed a promissory note with a face amount of $55,000, due at the end of six months, accruing interest at an annual rate of 6.50 percent, payable at maturity. Required: 1. For each of the transactions, indicate the accounts, amounts, and effects on the accounting equation. (Enter any decreases to account balances with a minus sign.) 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 $450,000 in total liabilities and $650,000 in total assets, yielding a debt-to-assets ratio of 0.69, prior to each transaction. (Round your answer to 2 decimal places.)

Answer 1

Answer:

1. January 10:

Inventory account increases by $25,500

Account payable increases by $25,500;

Total asset will increase by $25,500 and total liabilities will increases by $25,500. Equity remains the same.

March 1:

Cash account increases by $55,000.

Promissory note payable increases $55,000

Total asset will increase by $55,000 and total liabilities will increases by $55,000. Equity remains the same.

2.

The amount of cash will be paid at maturity date (Sep 1) of the note is $56,787.5

3.

Jan 10: debt-to-assets ratio = 0.70, thus increase in Debt to asset ratio comparing to the ratio 0.69 at the beginning

March 1: debt-to-assets ratio = 0.72, thus increase in Debt to asset ratio comparing to the ratio 0.69 at the beginning

Explanation:

- Working note for 2: Repayment will include Face value + Interest rate expenses incurred = 55,000 + 55,000 * 6.5% *6/12 = $56,787.5

- Working note for 3:

Jan 10: Debt-to-asset ratio = (450,000 + 25,500) / (650,000 + 25,500) = 0.70

Mar 1: Debt-to-asset ratio =(450,000 + 55,000) / (650,000 + 55,000) = 0.72

Answer 2

According to above equation, the total debt-to-asset ratio of January 10 is 0.70 and in March 1 is 0.72.

What is the term debt-to-asset ratio about?

Debt-to-asset ratio provides the percentage of the total assets financed by liabilities, creditors, and debt. It is calculated by dividing the total liabilities by the total assets.

Solution:-

1. January 10:-

Inventory account increases by $25,500

Account payable increases by $25,500

Total asset will increase by $25,500 and total liabilities will increases by $25,500. Equity remains the same.

March 1:

Cash account increases by $55,000.

Promissory note payable increases $55,000

Total asset will increase by $55,000 and total liabilities will increases by $55,000. Equity remains the same.

2. The amount of cash will be paid at maturity date (Sep 1) of the note is $56,787.5

3. Jan 10:- debt-to-assets ratio = 0.70, thus increase in Debt to asset ratio comparing to the ratio 0.69 at the beginning

March 1:- debt-to-assets ratio = 0.72, thus increase in Debt to asset ratio comparing to the ratio 0.69 at the beginning

Working note for 2:- Repayment will include Face value + Interest rate expenses incurred = 55,000 + 55,000 * 6.5% *6/12 = $56,787.5

Working note for 3:-

Jan 10:- Debt-to-asset ratio = (450,000 + 25,500) / (650,000 + 25,500) = 0.70

Mar 1:- Debt-to-asset ratio =(450,000 + 55,000) / (650,000 + 55,000) = 0.72

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