Question

I.The balance sheet for Shaver Corporation reported the following: cash, $10,000; short-term investments, $15,000; net accounts receivable, $45,000; inventories, $50,000; prepaids, $15,000; equipment, $113,000; current liabilities, $50,000; notes payable (long-term), $80,000; total stockholders’ equity, $118,000; net income, $4,320; interest expense, $6,400; income before income taxes, $8,280.

1. Compute Shaver’s debt-to-assets ratio and times interest earned ratio. (Round your answers to 2 decimal places.)

II. BSO, Inc., has assets of $810,000 and liabilities of $607,500 resulting in a debt-to-assets ratio of 0.75. For each of the following transactions, determine whether the debt-to-assets ratio will increase, decrease, or remain the same, and enter the value of the new debt-to-assets ratio. Each item is independent. (Round your answers to 2 decimal places.)

Purchased new inventory on credit $62,000	--------	--------
Paid accounts Payable in the amount of $113,000
Record accrued salary in the amount of $205,000
Borrowed $355,000 from local bank

Answer 1

I. Total liabilities= Current liabilities+Notes payable

= $50000+80000= $130000

Total assets= Cash+Short term investments+Net accounts receivable+Inventories+Prepaids+Equipment

= $10000+15000+45000+50000+15000+113000= $248000

Debt-to-assets ratio= Total liabilities/Total assets

= $130000/248000= 0.52

II. a) Purchased new inventory on credit $62000

When the company purchased inventory on credit the inventory and the accounts payable of the company will increases or we can say that both assets and liabilities will increases.

New assets= $810000+62000= $872000

New liabilities= $607500+62000= $669500

Debt-to-assets ratio= Total liabilities/Total assets

= $669500/872000= 0.77

b) Paid accounts Payable in the amount of $113000

When the company paid accounts payable the cash and the accounts payable of the company will decreases or we can say that both assets and liabilities will decreases.

New assets= $810000-113000= $697000

New liabilities= $607500-113000= $494500

Debt-to-assets ratio= Total liabilities/Total assets

= $494500/697000= 0.71

c) Record accrued salary in the amount of $205000

When the company record accrued salary the salaries payable of the company will increases while the retained earnings of the company will decreases which means that there will be no effect on assets

New liabilities= $607500+205000= $812500

Debt-to-assets ratio= Total liabilities/Total assets

= $812500/810000= 1.00

d) Borrowed $355000 from local bank

When the company borrowed $355000 from local bank the assets and the liabilities of the company will increases.

New assets= $810000+355000= $1165000

New liabilities= $607500+355000= $962500

Debt-to-assets ratio= Total liabilities/Total assets

= $962500/1165000= 0.83

Purchased new inventory on credit $62,000	Increase	0.77
Paid accounts Payable in the amount of $113,000	Decrease	0.71
Record accrued salary in the amount of $205,000	Increase	1.00
Borrowed $355,000 from local bank	Increase	0.83

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