The following is a December 31, 2018, post-closing trial balance for Culver City
ID: 2547181 • Letter: T
Question
The following is a December 31, 2018, post-closing trial balance for Culver City Lighting, Inc. Account Title Debits Credits Cash $ 58,000 Accounts receivable 42,000 Inventories 48,000 Prepaid insurance 18,000 Equipment 130,000 Accumulated depreciation—equipment $ 37,000 Patent, net 43,000 Accounts payable 13,500 Interest payable 3,500 Note payable (due in 10, equal annual installments) 130,000 Common stock 73,000 Retained earnings 82,000 Totals $ 339,000 $ 339,000 a. Calculate the current ratio. b. Calculate the acid-test ratio. c. Calculate the debt to equity ratio. rev: 01_23_2018_QC_CS-114707
Explanation / Answer
Answer a
Calculation of current ratio
Current Assets = Cash + Accounts receivable + Inventories + Prepaid insurance
= $58,000 +$42,000 + $48,000 + $18,000 = $166,000
Current Liabilities = Accounts payable + Interest payable + Note payable**
=$13,500 + $3,500 + $13,000 = $30,000
**Only current portion of Note payable ie installment due in next 12 months is to be consider as current liabilities = $130,000 / 10 = $13,000
Current ratio = Current Assets / Current Liabilities = $166,000 / $30,000 = 5.53
Answer b
Calculation of acid-test ratio
= ( Cash + Accounts receivable ) / Current Liabilities = ($58,000 +$42,000) / $30,000 = 3.33
Answer c
Calculation of debt to equity ratio.
Total Debt = Accounts payable + Interest payable + Note payable
= $13,500 + $3,500 + $130,000 = $147,000
Total Equity = Common stock + Retained earnings = $ 73,000 + $82,000 = $155,000
Debt to equity ratio = Debt / Equity = $147,000 / $155,000 = 0.95
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