Question

A company acquired land by signing a long-term note payable. What is the journal entry? Does the transaction increase, decrease, or have no effect on the following ratios:

(a) asset turnover ratio.

(b) net profit margin ratio.

(c) return on assets.

(d) current ratio.

Answer 1

Journal Entry For the transaction is as follows:

LAND A/C Dr.

To Note Payable A/C

( Being asset aquired by issuing a note payable)

Effect on the Ratios

A) On Asset Turnover ratio : This ratio Will decrease as the formula is Sale/Total Asset. As total asset increases, this ratio will decreases.

B) No Effect

C)Return on Asset : This ratio Will decrease As the return is calculated on total Assets. Total assets has been increased but Income Has not Changed, so Ratio will decrease.

D) No Effect On Current Ratio

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