6TI - Horngren'S Financial And Managerial Accounting

Question

Payne Corporation has the folowing accounts as of December 31, 2018:

Total Assets     $60,000

Total Liabilities     20,000

Total Equity       40,000

Compute the debt to equity ratio at December 31,2018.

Step-by-Step Solution

Answer

The debt-equity ratio of the Payne Corporation is 0.5:1 

Step 1: Definition of dent-equity ratio

The relationship between total liabilities and total equity is the debt to equity ratio.

Step 2: Debt-Equity ratio

The company's debt-equity ratio is calculated by dividing the liabilities by equity.

$\begin{array}{rcl}\mathrm{Debt} \mathrm{Equity} \mathrm{Ratio}& =& \frac{\mathrm{Total} \mathrm{Liabilities}}{\mathrm{Total} \mathrm{Equity}}\\ & =& \frac{\$20,000}{\$40,000}\\ & =& 0.5\end{array}$