Question

The current asset section of the Excalibur Tire Company’s balance sheet consists of cash, marketable securities, accounts receivable, and inventory. The December 31, 2021, balance sheet revealed the following: Inventory $ 1,000,000 Total assets $ 4,000,000 Current ratio 2.20 Acid-test ratio 1.40 Debt to equity ratio 1.5 Determine the following 2021 balance sheet items:

a. Current Assets?

b. Shareholder's Equity?

c. Long-term assets?

d. Long-term liabilities?

Answer 1

Working :

Current asset ratio = Current asset /current liabilities

2.20 =CA/CL

CA =2.20 CL                   [Equation 1 ]

Now,

Acid-test ratio = [Current asset -inventory ]/current liabilities

     1.40 = [CA - 1,000,000]/CL

     1.40 CL = [CA-1,000,000]

putting the value of CA from equation 1

    1.40 CL = [2.20CL -1,000,000]

    2.20 CL -1.40CL = 1000000

       .80 CL = 1,000,000

         CL = 1,000,000/.80

             = 1,250,000

a)Current asset = 2.20* 1,250,000

               = $ 2,750,000

b)Debt to equity ratio = Total debt /total equity

      1.5 =TD /TE

      TD = 1.5 TE

Nowusing accounting equation

Total asset =Total debt +total equity

4,000,000 = 1.5 TE +TE

4,000,000 = 2.5 TE

TE = 4,000,000 /2.5

        = 1,600,000

Total equity = $ 1,600,000

Shareholder's Equity = 1,600,000

c)Long term assets = Total asset - current asset

            = 4,000,000 - 2,750,000

           = 1,250,000

d)Total asset =Total debt +total equity

      4,000,000 = Ttal debt + 1,600,000

      Toal debt = 4000000-1600000

               = 2400000

Long term liabilities = Total debt -current liabilities

                    = 2400000- 1,250,000

                    = $ 1150000