Gates, Inc. and Markham, Inc. each had the same financial position on January 1,
ID: 2597162 • Letter: G
Question
Gates, Inc. and Markham, Inc. each had the same financial position on January 1, 2016. The following is a summary of each of their balance sheets as of January 1, 2016:
Current assets $ 330,000
Non-current assets 2,970,000
Current liabilities 165,000
Non-current liabilities 1,815,000
Common stock 907,500
Retained earnings 412,500
Gates is about to raise $200,000 in cash by issuing bonds. Markham is going to raise $200,000 on the same day by issuing common stock. Immediately after these transactions, which of the following statements will be correct?
a. Gates's current ratio will be higher than Markham's.
b. Gates's current ratio will be lower than Markham's.
c. Gates's debt to asset ratio will be higher than Markham's.
d. Gates's debt to asset ratio will be lower than Markham's.
Explanation / Answer
C. Gates debt to asset ratio will be higher than Markham's
Explanation : Gates issued bonds worth 200,000 which results in increase in debt to asset ratio
Old ratio = 1815000/2970000
= 0.61
New ratio = (1815000+200000)/2970000
= 0.68
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