Accounts Payable and Cash Discounts
Response to the following problem:
The Byrd Company had the following transactions during 2010 and 2011:
1. On December 24, 2010, a computer was purchased on account from Computers International for $60,000. Terms of the sale were 2/10, n/30.
2. Byrd calculated that to forgo the discount for the computer would be the equivalent of paying 36% interest annually on the $58,800 for the extra 20 days. Therefore, Byrd went to First Local Bank and signed a $60,000, 30-day note at 12% in order to take advantage of the discount terms. This transaction took place on December 29, 2010. (The account payable was paid on January 2, 2011, and the note was paid at maturity.)
3. On December 30, 2010, Byrd declared a $2.00 cash dividend to the common stockholders. Ten thousand shares were outstanding on this date. The dividend is to be paid on January 5, 2011.
Required
1. Prepare the journal entries for the Byrd Company for both 2010 and 2011. Assume that the net price method is used to account for the credit terms.
2. Show how the preceding items would be reported in the current liabilities section of Byrd's December 31, 2010 balance sheet.
3. Assuming Byrd's current assets were $1,200,000 and its current ratio was 2.4 at the end of 2009, compute the current ratio at the end of 2010 (based solely on the effects of the preceding transactions).