34PGA_4 - Horngren'S Financial And Managerial Accounting

Question

Question: Preparing financial statements from the trial balance and calculating the debt ratio

The trial balance as of July 31, 2018, for Sara Simon, Registered Dietician, is presented below:

Account Title                                       Debit            Credit

 Office Supplies                                 2,300

Cash                                                     38,000

Accounts Receivable                       9,000

Prepaid Insurance                            2,400

Equipment                                        16,000                                                     

Accounts Payable                                                    3,000

Unearned Revenue                                                  3,912

Notes Payable                                                         31,000

Common Stock                                                        18,000

Dividends                                   2,800

Salaries Expense                       1,700

Rent Expense                              1,100  

Utilities Expense                          500 

Service Revenue                                                   17,888

Total Balance                         \( 73,800             \) 73,800

Requirements 4. Calculate the debt ratio as of July 31, 2018.

Step-by-Step Solution

Answer

The debt ratio of the company is computed as 0.56 or 56%

Step-by-step Solution Step 1:Computation of Liabilities

$$\begin{gathered} \mathbf{Liabilities}\mathbf{=}\mathbf{AccountsPayable}\mathbf{+}\mathbf{UnearnedRevenue}\mathbf{+}\mathbf{NotesPayable} \\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{912}\mathbf{+}\mathbf{\$}\mathbf{31}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{37}\mathbf{,}\mathbf{912} \end{gathered}$$

Step 2: Computation of Debt Ratio

$$\begin{gathered} \mathbf{DebtRatio}\mathbf{=}\frac{\mathbf{TotalLiabilities}}{\mathbf{TotalAssets}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{37}\mathbf{,}\mathbf{912}}{\mathbf{\$}\mathbf{67}\mathbf{,}\mathbf{700}} \\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{56} \end{gathered}$$