Effect of Transactions on Debt-to-Equity Ratio

(Note: Consider completing this problem after Problem 13-1A to ensure that you obtain a clear understanding of the effect of various transactions on this measure of solvency.)

The following account balances are taken from the records of Degas Inc.:

Current liabilities $ 25,000 Long-term liabilities 125,000 Stockholders’ equity 400,000 Required 1. Use the information provided to compute Degas’s debt-to-equity ratio (round to three decimal points).

2. Determine the effect that each of the following transactions will have on Degas’s debt-to-equity ratio by recalculating the ratio and then indicating whether the ratio is increased, decreased, or not affected by the transaction. (Round to three decimal points.) Consider each transaction independently; that is, assume that it is the only transaction that takes place.

Effect of Transaction Transaction on Debt-to-Equity Ratio

a. Purchased inventory on account, $20,000

b. Purchased inventory for cash, $15,000

c. Paid suppliers on account, $30,000

d. Received cash on account, $40,000

e. Paid insurance for next year, $20,000

f. Made sales on account, $60,000 g. Repaid short-term loans at bank, $25,000 h. Borrowed $40,000 at bank for 90 days i. Declared and paid $45,000 cash dividend j. Purchased $20,000 of short-term investments k. Paid $30,000 in salaries l. Accrued additional $15,000 in taxes.

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