28E - Horngren'S Financial And Managerial Accounting

Question

Question: Calculating the debt ratio 

John Hart, M.D., reported the following trial balance as of September 30, 2018:

Account Title Office Supplies Cash Debit Credit Accounts Receivable Office Equipment Land Building Accounts Payable Utilities Payable Unearned Revenue Notes Payable Advertising Expense Utilities Expense Salaries Expense Service Revenue Dividends Common Stock Total Balance \( 256,700 \) 1,600 24,795 69,000 50,505 110,000 200 \( 30,000 \) 256,700 29,000 23,500 1,100 57,000 7,900 3,000 30,000 75,000 800 J

Calculate the debt ratio for John Hart, M.D

Step-by-Step Solution

Answer

The debt ratio of a business is computed as 0.55 or 55%

Step-by-Step Solution Step 1: Calculation of total assets

$$\begin{gathered} \mathbf{TotalAssets}\mathbf{=}\mathbf{Cash}\mathbf{+}\mathbf{AccountsReceivables}\mathbf{+}\mathbf{OfficeSupplies}\mathbf{+}\mathbf{Land}\mathbf{+}\mathbf{Building}\mathbf{+}\mathbf{OfficeEquipment} \\ \mathbf{=}\mathbf{30}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{7}\mathbf{,}\mathbf{900}\mathbf{+}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{29}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{75}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{30}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{174}\mathbf{,}\mathbf{900} \end{gathered}$$

Step 2: Calculation of Total Liabilities

$$\begin{gathered} \mathbf{TotalLiabilities}\mathbf{=}\mathbf{AccountsPayable}\mathbf{+}\mathbf{UtilitiesPayable}\mathbf{+}\mathbf{UnearnedRevenue}\mathbf{+}\mathbf{NotesPayable} \\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{+}\mathbf{800}\mathbf{+}\mathbf{24}\mathbf{,}\mathbf{795}\mathbf{+}\mathbf{69}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{96}\mathbf{,}\mathbf{195} \end{gathered}$$

Step 3: Calculations of Debt Ratio

$$\begin{gathered} \mathbf{DebtRatio}\mathbf{=}\frac{\mathbf{TotalLiabilities}}{\mathbf{Totalassets}} \\ \mathbf{=}\frac{\mathbf{96}\mathbf{,}\mathbf{195}}{\mathbf{174}\mathbf{,}\mathbf{900}} \\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{55} \end{gathered}$$