Q43PGB - Horngren'S Financial And Managerial Accounting

Question

Reporting liabilities on the balance sheet and computing debt to equity ratio

The accounting records of Compass Wireless include the following as of December 31, 2018:

Accounts Payable                     \( 74,000       Salaries Payable                          \) 7,500

Mortgages Payable (long-term) 80,000        Bonds Payable (current portion) 25,000

Interest Payable                          21,000         Premium on Bonds Payable         13,000

Bonds Payable (long-term)        63,000         Unearned Revenue (short-term)   2,700

Total Stockholders’ Equity        145,000

Requirements

1. Report these liabilities on the Compass Wireless balance sheet, including headings and totals for current liabilities and long-term liabilities.

2. Compute Compass Wireless’s debt to equity ratio at December 31, 2018.

Step-by-Step Solution

Answer

The total liabilities side is $286,200. Debt to equity ratio is 1.97.

Step 1: Definition of the salaries payable

The salaries payable is portion of the salary which are not paid to the employees till the closing of books.

Step 2: Balance Sheet

Compass Wireless
Balance Sheet
As of December 31, 2018
Current Liabilities:
Accounts Payable	$74,000
Salaries Payable	$7,500
Bonds Payable (Current Portion)	$25,000
Interest Payable	$21,000
Unearned Revenue	$2,700
Total Current Liabilities		$130,200
Long-term Liabilities:
Mortgage Payable	$80,000
Bonds Payable	$63,000
Add: Premium on Bonds Payable	$13,000
Shareholder’s Equity	$145,000
Total Long-term Liabilities		$301,000
Total Liabilities		$440,200

Step 3: Calculation of the debt-equity ratio

$\begin{array}{c}\text{Debt-to-equity\hspace{0.17em}ratio}=\frac{\text{Total\hspace{0.17em}\hspace{0.17em}Liabilties}}{\text{Total\hspace{0.17em}\hspace{0.17em}equity}}\\ =\frac{\text{\$286,200}}{\text{\$145,000}}\\ =\text{1.97}\end{array}$