Question

Last fiscal year, Widgets Inc. reported current assets of $970,000; current liabilities of $275,000; long-term assets of $650,000; longterm liabilities of $805,000; and stockholders' equity of $540,000. Two days after the fiscal year ended, Widgets signed a 1-year, 10\% note payable in exchange for equipment costing $78,000. As a result, the firm's debt to assets ratio increased from 55.8% to 59.8%. decreased from 68.2% to 66.7%. increased from 66.7% to 68.2%. decreased from 71.5% to 66.7%.

Answer 1

The debt to assets ratio of Widgets Inc. increased from 66.7% to 68.2% after the company signed a 1-year note payable for new equipment.

Step-by-step explanation:

The question pertains to calculating the change in the debt to assets ratio of Widgets Inc. after signing a 1-year, 10% note payable. Before the note was signed, the total assets were the sum of current assets ($970,000) and long-term assets ($650,000), totaling $1,620,000. The total liabilities were the sum of current liabilities ($275,000) and long-term liabilities ($805,000), totaling $1,080,000. Therefore, the initial debt to assets ratio was ($1,080,000 / $1,620,000) = 0.6667 or 66.7%. After acquiring the equipment with the $78,000 note, the total liabilities became $1,080,000 + $78,000 = $1,158,000, while the total assets became $1,620,000 + $78,000 = $1,698,000. The new debt to assets ratio is ($1,158,000 / $1,698,000) = 0.682 or 68.2%. Hence, the correct statement is: the firm's debt to assets ratio increased from 66.7% to 68.2%.