Question

Question:Preparing financial statements from the trial balance and calculating the debt ratio

The trial balance as of July 31, 2018, for Sara Simon, Registered Dietician, is presented below:

Account Title Debit Credit

Office Supplies 2,300

Cash 38,000

Accounts Receivable 9,000

Prepaid Insurance 2,400

Equipment 16,000

Accounts Payable 3,000

Unearned Revenue 3,912

Notes Payable 31,000

Common Stock 18,000

Dividends 2,800

Salaries Expense 1,700

Rent Expense 1,100

Utilities Expense 500

Service Revenue 17,888

Total Balance \( 73,800 \) 73,800

Requirements 4. Calculate the debt ratio as of July 31, 2018.

Short answer

The debt ratio of the company is computed as 0.56 or 56%

Step-by-step solution

Step-by-step SolutionStep 1:Computation of Liabilities

$$\begin{gathered} \mathbf{Liabilities}\mathbf{=}\mathbf{AccountsPayable}\mathbf{+}\mathbf{UnearnedRevenue}\mathbf{+}\mathbf{NotesPayable} \\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{912}\mathbf{+}\mathbf{\$}\mathbf{31}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{37}\mathbf{,}\mathbf{912} \end{gathered}$$

Computation of Debt Ratio

$$\begin{gathered} \mathbf{DebtRatio}\mathbf{=}\frac{\mathbf{TotalLiabilities}}{\mathbf{TotalAssets}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{37}\mathbf{,}\mathbf{912}}{\mathbf{\$}\mathbf{67}\mathbf{,}\mathbf{700}} \\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{56} \end{gathered}$$