Question

Bronco Electronics' current assets consist of cash, marketable securities, accounts receivable, and inventories. The following data were abstracted from a recent financial statement:

Inventories $ 195,000

Total assets $ 1,670,000

Current ratio 3.7

Acid-test ratio 2.70

Debt to equity ratio 1.5

Compute the long-term liabilities for Bronco

Long-Term Liabilities:

Answer 1

Answer : Long-Term Liabilities = $807,000

Explanation :

We know that ,

Current ratio = Current Assets / Current Liabilities = 3.7 (given)

Acid-test ratio = (Current Assets - Inventories) / Current Liabilities = 2.70 (given)

Inventories = $195,000 (given)

Now , current assets be X & current Liabilities be Y

we can form the following equation

X / Y = 3.7..... Equation 1

or X = 3.7 Y..... Equation 2

&

(X -$195,000) / Y = 2.70 .... Equation 3

Now substituting the value of X from Equation 2 in Equation 3 we get ,

(3.70 Y - $195,000) / Y = 2.70

3.70 Y - 2.70 Y = $195,000

Y = $195,000

Thus X = 3.7 * $195,000 = $721,500

Therefore , Current assets = $721,500 ; Current liabilities = $195,000

Now again we know that ,

Total Assets = Total Liabilities + Equity = $1,670,000 (given)

Debt to equity = Debt ( ie Total Liabilities) / Equity = 1.5 (given)

Let Total Liabilities = A & Equity = B

We can form the following equations.

A / B = 1.5..... Equation 1

or A = 1.5 B ..... Equation 2

&

$1,670,000 = A + B... Equation 3

Now substituting the value of A from Equation 2 in Equation 3 we get ,

$1,670,000 = 1.5 B + B

or B = $668,000

Thus A = $1,670,000 -  $668,000 = $1,002,000

Therefore , Total Liabilities = $1,002,000 & Equity = $668,000

Again ,

Total Liabilities = Current Liabilities + Long‐term Liabilities

Long‐term Liabilities = Total Liabilities - Current Liabilities

= $1,002,000 - $195,000 = $807,000