P5-1 1 (The effects of transactions on financial ratios) Burkholder Corporation borrowed $28,000 from its bank on January 1, 1996, at an annual interest rate of 10 percent. The $28,000 principal is to be paid as a lump sum at the end of the period ofthe loan, which is after December 31, 1997. This is the only interest-bearing debt held by Burkholder. REQUIRED: The chart below contains six independent cases, each related to the Burkholder Corporation. Compute the missing amount in each case, assuming that the loan described is Burkholder’s only outstanding loan. Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 12/31/96 interest payable balance 400 800 400 9 • 200 9 • Cash interest payments—1997 3,000 9 • 2,300 2,600 9 • 2,500 12/31/97 interest payable balance 9 • 300 9 • 200 400 0 Prustate Insurance Company collected $240,000 from Jacobs Printing Corporation for a twoyear fire insurance policy on May 31, 1996. The policy is in effect from June 1, 1996 to May 31, 1998. REQUIRED:

a. Assume that Prustate Insurance Company recorded the $240,000 cash collection as a lia¬ bility on May 31, 1996. 1. Prepare the entry to record the cash collection. 2. Prepare the adjusting entry necessary on December 31, 1996. 3. What was the purpose of the adjusting journal entry on December 31, 1996? 4. Complete a chart like the following. 1996 1997 1998 Total Insurance revenue Cash receipts associated with insurance

b. Assume that Jacobs’ Printing Corporation recorded the $240,000 cash payment as an asset on May 31, 1996. 1. Prepare the entry to record the cash payment. 2. Prepare the adjusting entry necessary on December 31, 1996. 3. What was the purpose of the adjusting journal entry on December 31, 1996? 4. Complete a chart like the following. 1996 1997 1998 Total Insurance expense Cash payments associated with insurance The balance sheet of Dawn and Company as of December 31, 1996 appears as follows: Assets Cash Accounts receivable Inventory Equipment Less: Accum. depr. Liabilities and Stockholders’ Equity $ 6,000 Accounts payable $11,000 7,000 Wages payable 2,000 20,000 Long-term notes payable 20,000 $45,000 Contributed capital 15,000 (10,000) 35,000 Retained earnings 20,000 Total liabilities and $68,000 stockholders’ equity $ 68.000 Total assets 248 Part 2 Use, Measurement, and Mechanics of Financial Statements required: Eight transactions that occurred during 1997 follow. Indicate the effect of each transaction on net income (revenues minus expenses), the current ratio (current assets divided by current lia¬ bilities), working capital (current assets minus current liabilities), and the debt/equity ratio (total debt divided by total stockholders’ equity) of Dawn and Company. Use the following key: increase (+), decrease (-), no effect (NE). Treat each transaction independently. Net Current Working Debt/Equity Transaction Income Ratio Capital Ratio 1. Issued ownership shares for $12,000 cash. 2. Purchased equipment costing $8,000 for cash. 3. Paid off a $700 long-term note payable. 4. Sold inventory for $10,000 cash. 5. Declared a $1,000 dividend but not paid. 6. Paid $2,000 in wages payable. 7. Received $5,000 from customers on account. 8. Incurred and paid $1,800 in interest on notes payable.