40PGB_4 - Horngren'S Financial And Managerial Accounting

Question

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

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

Account Title                                       Debit            Credit

 Office Supplies                                 1,400

Cash                                                     32,000

Accounts Receivable                       9,100

Prepaid Insurance                            2,600

Equipment                                        24,000                                                     

Accounts Payable                                                    3,400

Unearned Revenue                                                 1,296

Notes Payable                                                         34,000

Common Stock                                                         20,000

Dividends                                   3,000

Salaries Expense                       1,600

Rent Expense                              700  

Utilities Expense                          100 

Service Revenue                                                   15,804

Total Balance                         \( 74,500             \) 74,500

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

Step-by-Step Solution

Answer

The debt ratio of the business is 0.56 or 56%

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

$$\begin{gathered} \mathbf{Liabilities}\mathbf{=}\mathbf{AccountsPayable}\mathbf{+}\mathbf{UnearnedRevenue}\mathbf{+}\mathbf{NotesPayable} \\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{400}\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{296}\mathbf{+}\mathbf{\$}\mathbf{34}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{38}\mathbf{,}\mathbf{696} \end{gathered}$$

Step 2: Computation of Debt Ratio

$$\begin{gathered} \mathbf{DebtRatio}\mathbf{=}\frac{\mathbf{TotalLiabilities}}{\mathbf{TotalAssets}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{38}\mathbf{,}\mathbf{696}}{\mathbf{\$}\mathbf{69}\mathbf{,}\mathbf{100}} \\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{56} \end{gathered}$$