Question

Byrd Company had the following transactions during 2016 and 2017:

1. On December 24, 2016, a computer was purchased on account from Computers International for $60,000. Terms of the sale were 2/10, n/30.
2. Byrd calculated that to forgo the discount for the computer would be the equivalent of paying 36% interest annually for the extra 20 days.

Therefore, Byrd went to First Local Bank and signed a $60,000, 30-day note at 12% in order to take advantage of the discount terms. This transaction took place on December 29, 2016. (The account payable was paid on January 2, 2017, and the note was paid at maturity. Assume a 360-day year.)

3. On December 30, 2016, Byrd declared a $2.00 cash dividend to the common shareholders. Ten thousand shares were outstanding on this date. The dividend is to be paid on January 5, 2017. (Byrd Company charges dividends directly to retained earnings.)

Required:
a. Prepare the journal entries for Byrd for both 2016 and 2017. Assume that the net price method is used to account for the credit terms.
b. Show how the preceding items would be reported in the current liabilities section of Byrd's December 31, 2016, balance sheet.
c. Assuming Byrd's current assets were $1,200,000 and its current ratio was 2.4 at the end of 2015, compute the current ratio at the end of 2016 (based solely on the effects of the preceding transactions). (Round your answer to two decimal places.)

Byrd's current ratio at the end of 2016 is ______.

Answer 1

Answer:

A. Dec. 24, 2016

Dr Equipment-Computer58800

Cr Accounts payable 58800

Dec. 29, 2016

Dr Cash 60000

Cr Notes payable 60000

Dec. 30, 2016

Dr Retained earnings 20000

Cr Dividends payable 20000

Dec. 31, 2016

Dr Interest expense 40

Cr Interest payable 40

Jan. 2, 2017

Dr Accounts payable 58800

Cr Cash 58800

Jan. 5, 2017

Dr Dividends payable 20000

Cr Cash 20000

Jan. 28, 2017

Dr Interest payable 40

Dr Interest expense560

Dr Notes payable 60000

Cr Cash 60600

B.$ 138840

C. 2016 1.9

Step-by-step explanation:

a. Preparation of the journal entries for Byrd for both 2016 and 2017.

Dec. 24, 2016

Dr Equipment-Computer58800

[$60000 x (1-0.02)]

Cr Accounts payable 58800

(To record purchase of computer on account)

Dec. 29, 2016

Dr Cash 60000

Cr Notes payable 60000

(To record issuance of note payable)

Dec. 30, 2016

Dr Retained earnings ($2.00 x 10000) 20000

Cr Dividends payable 20000

(To record dividends declared)

Dec. 31, 2016

Dr Interest expense 40

($60000 x 12% x 2/360)

Cr Interest payable 40

(To record interest accrued on the note)

Jan. 2, 2017

Dr Accounts payable 58800

Cr Cash 58800

(To record payment on account)

Jan. 5, 2017

Dr Dividends payable 20000

Cr Cash 20000

(To record payment of dividends)

Jan. 28, 2017

Dr Interest payable 40

Dr Interest expense560

($60000 x 12% x 28/360)

Dr Notes payable 60000

Cr Cash 60600

(To record payment on note and interest thereon on maturity)

B. Calculation to Show how the preceding items would be reported in the current liabilities section of Byrd's December 31, 2016, balance sheet.

BYRD COMPANY

Balance Sheet (Partial)

December 31, 2016

Current liabilities

Accounts payable 58800

Notes payable 60000

Interest payable 40

Dividends payable 20000

Total current liabilities $ 138840

C. computation for the current ratio at the end of 2016

Using this formula

Current ratio = Current assets/Current liabilities

End of 2015: 2.4 = $1200000/Current liabilities

Current liabilities = $1200000/2.4 = $500000

End of 2016: Current assets = $1200000 + $60000 = $1260000

Current liabilities = $500000 + $58800 + $60000 + $20000 + $40 = $638840

Now let calculate the Current ratio

Current ratio = $1260000/$638840

Current ratio= 1.9

Therefore Byrd's current ratio at the end of 2016 is 1.9