BSO, Inc., has assets of $680,000 and liabilities of $510,000 resulting in a debt-to-assets ratio of...
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BSO, Inc., has assets of $680,000 and liabilities of $510,000 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.) |
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Homework Answers
Existing assets = $680000, Existing debt = $510000, Existing debt assets ratio = 0.75.
(a) Purchase $36000 inventory on credit: It will increase the assets as inventory is coming in. It will also increase the liabilities / debt as a current liability to pay is created. Debt to assets ratio will also increase as per below.
New assets = $680000 + $36000 = $716000
New debt = $510000 + $36000 = $546000
New debt assets ratio = $546000 / $716000 = 0.76
So, debt assets ratio will increase.
(b) Paid accounts payable $74000: It will decrease the assets (as cash is paid) and liabilities / debt (as accounts payable are settled or decreased). It will also decrease the debt to assets ratio as per below:
New assets = $680000 - $74000 = $606000
New debt = $510000 - $74000 = $436000
New debt assets ratio = $436000 / $606000 = 0.72
So, debt assets ratio will decrease.
(c) Recorded accrued salaries $140000: Assets will remain same as there is no outgo of cash or any other asset. Also liabilities / debt will increase in the form of current liabilities. It will increase the debt to assets ratio as per below:
New assets = $680000
New debt = $510000 + $14000 = $524000
New debt assets ratio = $524000 / $680000 = 0.77
So, debt assets ratio will increase.
(d) Borrowed $290000 from a local Bank: It will increase the assets as cash is coming in the business and liabilities / debt is also increased as current liability to pay within 90 days is created. Debt to assets ratio will also increase as per below.
New assets = $680000 + $290000 = $970000
New debt = $510000 + $290000 = $800000
New debt assets ratio = $800000 / $970000 = 0.82
So, debt assets ratio will increase.
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