Q12SE - Horngren'S Financial And Managerial Accounting

Question

Computing the debt to equity ratio

Jackson Corporation has the following amounts as of December 31, 2018.

Total assets $ 55,250

Total liabilities 22,750

Total equity 32,500

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

Step-by-Step Solution

Answer

The debt-to-equity ratio is 0.70

Step 1: Definition of debt-to-equity ratio

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

Step 2: Calculation of the debt-to-equity ratio

The company’s debt-to-equity ratio is calculated by dividing total liabilities by total equity.

$\begin{array}{c}\text{Debt-to-Equity =}\frac{\text{Total\hspace{0.17em}\hspace{0.17em}Liabilities}}{\text{Total\hspace{0.17em}\hspace{0.17em}Equity}}\\ \text{ =}\frac{\text{\$22,750}}{\text{\$32,500}}\\ \text{ =0.70}\end{array}$