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On January 1, 2021, the general ledger of Freedom Fireworks includes the following account balances: Accounts Debit Credit Cash $ 11,200 Accounts Receivable 34,000 Allowance
On January 1, 2021, the general ledger of Freedom Fireworks includes the following account balances:
Accounts | Debit | Credit | |||||
Cash | $ | 11,200 | |||||
Accounts Receivable | 34,000 | ||||||
Allowance for Uncollectible Accounts | $ | 1,800 | |||||
Inventory | 152,000 | ||||||
Land | 67,300 | ||||||
Buildings | 120,000 | ||||||
Accumulated Depreciation | 9,600 | ||||||
Accounts Payable | 17,700 | ||||||
Common Stock | 200,000 | ||||||
Retained Earnings | 155,400 | ||||||
Totals | $ | 384,500 | $ | 384,500 | |||
During January 2021, the following transactions occur:
January 1 | Borrow $100,000 from Captive Credit Corporation. The installment note bears interest at 7% annually and matures in 5 years. Payments of $1,980 are required at the end of each month for 60 months. | |
January 4 | Receive $31,000 from customers on accounts receivable. | |
January 10 | Pay cash on accounts payable, $11,000. | |
January 15 | Pay cash for salaries, $28,900. | |
January 30 | Firework sales for the month total $195,000. Sales include $65,000 for cash and $130,000 on account. The cost of the units sold is $112,500. | |
January 31 | Pay the first monthly installment of $1,980 related to the $100,000 borrowed on January 1. Round your interest calculation to the nearest dollar. |
7. Analyze the following for Freedom Fireworks: Requirement 1: a-1. Calculate the debt to equity ratio. Debt to Equity Ratio Choose Numerator Choose Denominator Il Debt to Equity Ratio Debt to Equity Ratio . a-2. If the average debt to equity ratio for the industry is 1.0, is Freedom Fireworks more or less leveraged than other companies in the same industry? O Less leveraged More leveraged Requirement 2: b-1. Calculate the times interest earned ratio. Times Interest Earned Ratio Choose Numerator Choose Denominator Time Interest Earned Ratio Time Interest Earned Ratio b-2. If the average times interest earned ratio for the industry is 20 times, is the company more or less able to meet interest payments than other companies in the same industry? O More able to meet interest O Less able to meet interest Requirement 3: c. Based on the ratios calculated in (a) and (b), would Freedom Fireworks be more likely to receive a higher or lower interest rate than the average borrowing rate in the industry? O Lower interest rate O Higher interest rate
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