Hermann Company reported these ratios at December 31, 2016 (dollar amounts in mi
ID: 2404844 • Letter: H
Question
Hermann Company reported these ratios at December 31, 2016 (dollar amounts in millions): Current ratio $10 Hermann Company completed these transactions during 2017 $40 Debt ratio $70 $20 2.00 0.57 (Click the icon to view the transactions.) Requirement 1. Determine whether each transaction improved or hurt Hermann's current ratio and debt ratio. (Review each transaction independently. Round calculations to two decimal places.) a. Let's begin by calculating the current ratio and debt ratio to include the purchase of the equipment. Current ratio = Debt ratio Hurts current ratic Hurts debt ratio More Info b. Now calculate the current ratio and debt ratio to include the payment of long-term debt. Current ratio Debt ratio - a. Purchased equipment on account, $4 b. Paid long-term debt, $9 c. Collected cash from customers in advance, $4 d. Accrued interest expense, $6 e. Made cash sales, $8 current ratio debt ratio c. Next, calculate the current ratio and debt ratio to include the receipt of customer advances rrent ratioDebt ratio Debt ratio- current ratio debt ratio d. Now calculate the current ratio and debt ratio to include the accrual of interest expense Print Done Current ratioDebt ratio current ratio debt ratio e. Finally, calculate the current ratio and debt ratio to include the cash sales Curent ratio Debt ratio current ratio debt ratioExplanation / Answer
Solution a:
Current assets after purchase of equipment = $20 + 0 = $20
Current liabilities after purchase of equipment = $10 + $4 = $14
Total debt after purchase of equipment = $40 + $4 = $44
Total assets after purchase of equipment = $70 + $4 = $74
Current ratio after transaction = $20 / $14 = 1.43 - Hurts
Debt ratio after transaction = $44/$74 = 0.59 - Hurts
Solution b:
Current assets after paying long term debt = $20 - $9 = $11
Current liabilities after paying long term debt = $10 - $0 = $10
Total debt after paying long term debt = $40 - $9 = $31
Total assets after paying long term debt = $70 - $9 = $61
Current ratio after transaction = $11 / $10 = 1.1 - Hurts
Debt ratio after transaction = $31/$61 = 0.51 - Improved
Solution c:
Current assets after transaction = $20 + $4 = $24
Current liabilities after transaction = $10 + $4 = $14
Total debt after transaction= $40 + $4 = $44
Total assets after transaction = $70 + $4 = $74
Current ratio after transaction = $24 / $14 = 1.71 - Hurts
Debt ratio after transaction = $44/$74 = 0.59 - Hurts
Solution d:
Current assets after transaction = $20 + $0 = $20
Current liabilities after transaction = $10 + $6 = $16
Total debt after transaction= $40 + $6 = $46
Total assets after transaction = $70 + $0 = $70
Current ratio after transaction = $20 / $16 = 1.25 - Hurts
Debt ratio after transaction = $46/$70 = 0.66 - Hurts
Solution e:
Current assets after transaction = $20 + $8 = $28
Current liabilities after transaction = $10 + $0 = $10
Total debt after transaction= $40 + $0 = $40
Total assets after transaction = $70 + $8 = $78
Current ratio after transaction = $28 / $10 = 2.80 - Improved
Debt ratio after transaction = $40/$78 = 0.51 - Improved