Chapter 2, Problem 2.15E

Analyzing the Effects of Transactions Using T-Accounts and Interpreting the Current Ratio as a Manager of the Company

Higgins Company began operations last year. You are a member of the management team investigating expansion ideas that will require borrowing funds from banks. At the start of the current year. Higgins’s T-account balances were as follows:

Assets:

Cash
5,000

Liabilities:

Short-Term Investments

2,500

Property and Equipment

3,000

Short-Term Notes Payable 2,200

Stockholders ' Equity:

Long-Term Notes Payable 1,800

Common Stock
1	500

Additional Paid-in Capital

4,000

Retained Earnings

3,000

Required:

1. Using the data from these T-accounts, determine the amounts for the following on January 1 of the current year

Assets $ ____ = Liabilities $__+ Stockholders’ Equity $__

2. Enter the following transactions for the current year in the T-accounts:

1. (a) Borrowed $4,000 from a local bank, signing a note due in three years.
2. (b) Sold $1,500 of the investments for $1,500 cash.
3. (c) Sold one-half of the property and equipment for $1,500 in cash.
4. (d) Declared and paid $,800 in cash dividends to stockholders.

3. Compute ending balances in the T-accounts to determine amounts for the following on December 31 of the current year

Assets $ _____ = Liabilities $ _____ + Stockholders’ Equity $ _____

4. Calculate the current ratio at December 31 of the current year. If the industry average for the current ratio is 1.50. What does your computation suggest to you about Higgins Company? Would you suggest that Higgins Company increase its short-term liabilities? Why or why not?