5TI - Horngren'S Financial And Managerial Accounting

Question

Using the following accounts and their balances, calculate the debt ratio for Cooper Furniture Repair as of December 31.

Cash \( 7,000                                  Advertising Expense \) 1,200 

Unearned Revenue 4,500           Utilities Expense 800 

Equipment 10,000                        Rent Expense 5,000 

Service Revenue 8,000                Accounts Payable 2,300 

Common Stock 12,200                Dividends 3,000

Step-by-Step Solution

Answer

Answer

The debt ratio of Cooper Furniture repair is 0.40

Step 1: Computation of total liabilities

$$\begin{gathered} \mathbf{Total}\mathbf{ }\mathbf{liabilities}\mathbf{=}\mathbf{Accounts}\mathbf{ }\mathbf{payable}\mathbf{+}\mathbf{Unearned}\mathbf{ }\mathbf{Revenue} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{2}\mathbf{,}\mathbf{300}\mathbf{+}\mathbf{4}\mathbf{,}\mathbf{500} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{800} \end{gathered}$$

Step 2: Computation of total assets

$$\begin{gathered} \mathbf{Total}\mathbf{ }\mathbf{Assets}\mathbf{=}\mathbf{Cash}\mathbf{+}\mathbf{Equipment} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{7}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{10}\mathbf{,}\mathbf{000} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{17}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 3: Computation of debt ratio

$$\begin{gathered} \mathbf{Debt}\mathbf{ }\mathbf{Ratio}\mathbf{=}\frac{\mathbf{Total}\mathbf{ }\mathbf{Liabilities}}{\mathbf{Total}\mathbf{ }\mathbf{Assets}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{6}\mathbf{,}\mathbf{800}}{\mathbf{17}\mathbf{,}\mathbf{000}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{0}\mathbf{.}\mathbf{40} \end{gathered}$$