Chapter 5: Q21BP-d (page 531)

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:
In $ millions
In $ millions
Current assets
$70
Current liabilities
$30
Fixed assets
$70
Long-term liabilities
$30
Total liabilities
$60
Stockholder’s equity
$80
Total assets
$140
Total stockholder’s equity and liabilities
$140
The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.
d. Compute total debt to equity on the original and revised balance sheets.

Expert verified

The total debt to equity ratio before revision is 75% and after revision is 182.5%.

Step by step solution

The total debt to equity ratio is 75%.

$Debt to equity ratio = \frac{Total debt}{Total equity} = \frac{$ 60}{$ 80} = 75 %$

The total debt to equity ratio is 182.5%.

$Debt to equity ratio = \frac{Total debt}{Total equity} = \frac{$ 146.024}{$ 80} = 182.5 %$

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In \( millions		In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder’s equity	\)80
Total assets	\(140	Total stockholder’s equity and liabilities	\)140

Bailey corporation
Income statement
For the year 20X1
Sales (all on credit)	\(42,680,000
Cost of goods sold	\)32,240,000
Gross profit	\(10,440,000
Selling and administrative expenses	\)4,558,000
Operating profit	\(5,882,000
Interest expense	\)600,000
Net income before taxes	\(5,282,000
Taxes	\)2,120,000
Net income	\(3,162,000

Bailey corporation
Balance sheet
As of December 31, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)6,000,000
Inventory	\(8,300,000
Total current assets	\)14,680,000
Net plant and equipment	\(13,970,000
Total assets	\)28,650,000
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	\(3,800,000
Notes payable	\)3,550,000
Total current liabilities	\(7,350,000
Long-term liabilities	\)5,620,000
Total liabilities	\(12,970,000
Stockholder’s equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder’s equity	\)15,680,000
Total liabilities and stockholder’s equity	$28,650,000