Question

Cornerstone Exercise 9-41 Ratio Analysis Red Corporation had $1,750,000 in total liabilities and $3,000,000 in total assets as of December 31, 2020. Of Red's total liabilities, $600,000 is long-term. Required: Calculate Red's debt to assets ratio and its long-term debt to equity ratio. Round your answers to four decimal places, if required. Debt to Total Assets fill in the blank 1 Long-Term Debt to Total Equity fill in the blank 2

Answer 1

A. Debt to Total Assets ratio 0.5833 times

B. Long Term Debt to Total Equity Ratio 0.48 times

Explanation:

A. Calculation for Red's debt to assets ratio using this formula

Debt to Total Assets ratio = Total Liabilities/

Total Assets

Let plug in the formula

Debt to Total Assets ratio=$1,750,000/$3,000,000

Debt to Total Assets ratio=0.5833 times

Therefore the Debt to Total Assets ratio will be 0.5833 times

B. Calculation to determine its long-term debt to equity ratio

First step is to calculate the Shareholders’ Equity using this formula

Shareholders’ Equity = Total Assets – Total outside liabilities

Let plug in the formula

Shareholders’ Equity = $3,000,000-$1,750,000 Shareholders’ Equity =$1,250,000

Now let calculate the Long Term Debt to Total Equity Ratio using this formula

Long Term Debt to Total Equity Ratio = Long Term Debt/ Total Shareholder’s equity

Let plug in the formula Long Term Debt to Total Equity Ratio=$600,000/$1,250,000

Long Term Debt to Total Equity Ratio= 0.48 times

Therefore Long Term Debt to Total Equity Ratio will be 0.48 times