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Homework answers / question archive / 1Digger Company
1Digger Company. Digger's condensed and adapted balance sheet at December 31, 2015, follows: Total current assets. Properties, plant, equipment, and other assets. (In millions) $15.2 15.8 $31.0 $ 8.6 5.8 Total current liabilities. Total long-term liabilities. Total shareholders' equity 16.6 $31.0 Assume that during of the following year, 2016. Digger completed the following transactions: a. Earned revenue of $2.7 million, on account. b. Borrowed $7.0 million on long-term debt. c. Paid half of the current liabilities. d. Paid selling expense of $0.6 million. e. Accrued general expense of $0.7 million. Credit General Expense Payable, a current liability. f. Purchased equipment for $4.2 million, paying cash of $1.7 million and signing a long-term note payable for $2.5 million. g. Recorded depreciation expense of $0.3 million. Compute Digger's current ratio, net working capital and debt ratio at December 31, 2015. Make the adjusting entries for year 2016 transactions. Construct Income Statement. Retained Earning Statement and Balance Sheet at December 31, 2016 Compute Digger's current ratio, net working capital and debt ratio at December 31, 2016. Did the net working capital, current ratio and debt ratio improve or deteriorate during 2016? (Show your solution step by step) (70 Points)
Answer 1)
For 2015
Current Ratio (CR) = Current Assets/Current Liabilities
CR = 15.2/8.6 = 1.76:1
Net Working Capital (NWC) = Current Assets - Current Liabilities
NWC = 15.20 - 8.60 = $6.60 million.
Debt ratio (DR) = Total Debts/Total Asset
DR = (8.6+5.8)/31
DR = 0.46:1
Answer 2)
| Particulars | Debit (in million $) | Credit (in million $) |
| Trade Receivables | 2.7 | |
| Revenue Income | 2.7 | |
| Bank | 7 | |
| Long-term debt | 7 | |
| Current Liabilities | 4.3 | |
| Bank | 4.3 | |
| Selling Expense | 0.60 | |
| Bank | 0.60 | |
| General Expense | 0.70 | |
| General Expense Payable | 0.70 | |
| Equipment | 4.2 | |
| Bank | 1.7 | |
| Long-term note payable | 2.5 | |
| Depreciation | 0.30 | |
| Accumulated Depreciation | 0.30 |
Answer 3)
Income Statement for the year ended 31 December 2016
| Particulars | Amount (in $ million) |
| Revenue | 2.7 |
| Less: Expenses | |
| Selling Expense | 0.60 |
| General Expense | 0.70 |
| Depreciation | 0.30 |
| Net Profit | 1.1 |
Retained Earning for the year ended 31 December 2016
| Particulars | Amount (in $ million) |
| Opening balance of Shareholder's equity | 16.60 |
| Add: Profit during the year | 1.10 |
| Closing Balance | 17.70 |
Balance as at 31 December 2016
| Particulars | Amount (in $ million) |
| Total Current Assets | 18.3 |
| Property, plant and equipment and other assets (Net) | 19.7 |
| Total | 38 |
| Total Current Liabilities | 5 |
| Total Long-term liabilities | 15.3 |
| Total Shareholders' Funds | 17.70 |
| Total | 38 |
Answer 4)
For 2016
Current Ratio (CR) = Current Assets/Current Liabilities
CR = 18.3/5 = 3.66:1
Net Working Capital (NWC) = Current Assets - Current Liabilities
NWC = 18.3 - 5 = $13.3 million.
Debt ratio (DR) = Total Debts/Total Asset
DR = (5+15.3)/38
DR = 0.53:1
Comparison w.r.t. 2015
| Particulars | 2015 | 2016 | Increase/(Decrease) |
| Current ratio | 1.76:1 | 3.66:1 | Increased |
| Net Woking Capital | $6.6 million | $13.3 million | Increased |
| Debt ratio | 0.46:1 | 0.53:1 | Increased |
