Question

acg2071 managerial accounting section 26 instructor: petty
requirement 1d. compute the debt ratio for both companies for the current year
begin by selecting the formula to compute the debt ratio
debt ratio = total liabilities \div total assets
now, compute the debt ratio for both companies (round your answers to the one tenth of a percent, x.x%.)
\t\t\telectricity corp.\tzone, inc.
debt ratio\t\t% \t%
balance sheet and market price data
selected balance sheet and market price data at the end of the current year
\t\t\telectricity corp.\tzone
current assets
cash\t\t$ 28,000\t$ 15,000
short - term investments\t\t35,000\t12,000
accounts receivable, net\t\t37,000\t41,000
merchandise inventory\t\t61,000\t101,000
prepaid expenses\t\t22,000\t10,000
total current assets\t\t$ 183,000\t$ 179,000
total assets\t\t$ 260,000\t$ 332,000
total current liabilities\t\t103,000\t98,000
total liabilities\t\t103,000\t132,000
common stock
$1 par (11,000 shares)\t\t11,000\t
$1 par (21,000 shares)\t\t\t21,000
income statement data
selected income statement data for the current year
\t\t\telectricity corp.\tzone
net sales revenue (all on credit)\t$ 425,000\t$ 400,000
cost of goods sold\t\t208,000\t290,000
interest expense\t\t0\t22,000
net income\t\t56,000\t70,000

Explanation:

Step1: Recall the debt ratio formula

The formula for debt ratio is \( \text{Debt ratio} = \frac{\text{Total liabilities}}{\text{Total assets}} \times 100\% \) (to express as a percentage).

Step2: Calculate for Electricity Corp.

For Electricity Corp., Total liabilities = $103,000 and Total assets = $260,000.
Substitute into the formula: \( \text{Debt ratio} = \frac{103000}{260000} \times 100\% \)
\( \frac{103000}{260000} \approx 0.39615 \), multiply by 100% gives \( 0.39615\times100\% = 39.615\% \), round to one decimal place: \( 39.6\% \)

Step3: Calculate for Zone, Inc.

For Zone, Inc., Total liabilities = $132,000 and Total assets = $332,000.
Substitute into the formula: \( \text{Debt ratio} = \frac{132000}{332000} \times 100\% \)
\( \frac{132000}{332000} \approx 0.39759 \), multiply by 100% gives \( 0.39759\times100\% = 39.759\% \), round to one decimal place: \( 39.8\% \)

Answer:

Electricity Corp. debt ratio: \( 39.6\% \)
Zone, Inc. debt ratio: \( 39.8\% \)