Chapter 3 In-class Exercises SOLUTIONS

Account Title   Debits   Credits

Cash $ 20,000      
Accounts receivable   130,000      
Raw materials   24,000      
Note receivable   100,000      
Interest receivable   3,000      
Interest payable      $ 5,000 
Marketable securities   32,000      
Land   50,000      
Buildings   1,300,000      
Accumulated depreciation—buildings        620,000 
Work in process   42,000      
Finished goods   89,000      
Equipment   300,000      
Accumulated depreciation—equipment        130,000 
Patent (net of amortization)   120,000      
Prepaid rent (for the next two years)   60,000      
Deferred revenue        36,000 
Accounts payable        180,000 
Note payable        400,000 
Cash restricted for payment of note payable   80,000      
Allowance for uncollectible accounts        13,000 
Sales revenue        800,000 
Cost of goods sold   450,000      
Rent expense   28,000      

1. The note receivable, along with any accrued interest, is due on November 22, 2019.
2. The note payable is due in 2022. Interest is payable annually.
3. The marketable securities consist of treasury bills, all of which mature in the next year.
4. Defered revenue will be recognized as revenue equally over the next two years.

Current assets:
Cash $ 20,000
Accounts receivable 130,000
Less: Allowance for uncollectible accounts (13,000)
Note receivable 100,000
Interest receivable 3,000
Marketable securities 32,000
Raw materials 24,000
Work in process 42,000
Finished goods 89,000
Prepaid rent (one-half of $60,000) 30,000
Total current assets $457,000

Current liabilities:
Deferred revenue (one half of $36,000) 18,000
Accounts payable 180,000
Interest payable 5,000
Total current liabilities (203,000)

Working capital $254,000

B.

Cash 200
Short-term investments 150
Accounts receivable 200
Inventories 350
Property, plant, and equipment (net) 1,000
Current liabilities 400
Long-term liabilities 350
Paid-in capital 750
Retained earnings 400
Sales 4,600
Interest expense 40
Income tax expense 100
Net income 160

1. Calculate the current ratio. 

2. Calculate the acid-test ratio. 
3. Calculate the debt to equity ratio. 
4. Calculate all ratios for the extended DuPont Framework

1. Current ratio [$200 + 150 + 200 + 350] ÷ $400 = 2.25

2. Acid-test ratio [$200 + 150 + 200] ÷ $400 = 1.375
3. Debt to equity ratio [$400 + 350] ÷ [$750 + 400] = 0.654
4. Done by hand in class