Question

The following is a December 31, 2018, post-closing trial balance for Culver City Lighting, Inc. Account Title Debits Credits Cash $ 74,000 Accounts receivable 58,000 Inventories 64,000 Prepaid insurance 34,000 Equipment 150,000 Accumulated depreciation—equipment $ 53,000 Patent, net 59,000 Accounts payable 21,500 Interest payable 11,500 Note payable (due in 10, equal annual installments) 200,000 Common stock 89,000 Retained earnings 64,000 Totals $ 439,000 $ 439,000 a. Calculate the current ratio. b. Calculate the acid-test ratio. c. Calculate the debt to equity ratio.

Answer 1

Answer:

a. Current Ratio is 4.33 times

b. Acid Test Ratio is 2.49 times                                            

c. Debt Equity Ratio is 1.52 times

Explanation:

a. Current Ratio : In this ratio, it shows a relationship between current asset and current liabilities.  

So, Current ratio = Current Assets ÷ Current liabilities

where current assets = Cash + Accounts receivable + Inventories + Prepaid insurance

So, current assets = $74,000 + $58,000 + $ 64,000 + $34,000 = $230,000

And, Current liabilities = Accounts payable + Interest payable + notes payable

So, current liabilities = $21,500 + $11,500 + $20,000 = $53,000

Now apply these amounts to above formula

= $230,000 ÷ $53,000

= 4.33 times

Hence, Current Ratio is 4.33 times

 b. Acid test Ratio : In this ratio, it shows a relationship between quick asset and current liabilities.  

So, Acid Test ratio = Quick Assets ÷ Current liabilities    

where quick assets = Cash + Accounts receivable

                                  = $74,000 + $58,000

                                  = $132,000

And, Current liabilities = Accounts payable + Interest payable + notes payable

So, current liabilities = $21,500 + $11,500 + $20,000 = $53,000

Now apply these amounts to above formula

= $132,000 ÷ $53,000

= 2.49 times

Hence, Acid Test Ratio is 2.49 times                                            

c. Debt Equity Ratio : The debt equity ratio shows a relationship between total debt and total equity of the firm. It helps to calculate the profitability of the company.  

Where total debt includes accounts payable, interest payable, notes payable etc and total equity includes common stock, retained earnings, etc.  

So, The formula to compute debt equity ratio  

= Total debt ÷ Total Equity  

where,  

Total debt = Accounts payable +  interest payable + notes payable

                 = $21,500 + $11,500 + $200,000

                 = $233,000

And total Equity = Common stock + retained earnings

                          = $89,000 + $64,000

                          = $153,000

So, debt equity ratio = $233,000 ÷ $153,000

                                  = 1.52 times