Question

What is the stockholders’ equity to debt ratio for the following data? Total current liabilities (noninterest bearing) - $300,000; bonds payable, 5% (issued in 2007, due in 20 years) - $600,000; preferred 6% stock, $200 par - $240,000; common stock, $20 par - $480,000; premium on common stock - $120,000; retained earnings - $420,000. Income before income taxes was $180,000 and income taxes were $78,000 for the current year.

Answer 1

Stockholders’ equity to debt ratio is 1.48.

Step-by-step explanation:

Stockholders’ equity to debt ratio of a company refers to its stockholders’ equity divided by its total debts or liabilities. This can be stated as follows:

Stockholders’ equity to debt ratio = Stockholders’ equity / Total liabilities

To calculate the Stockholders’ equity to debt ratio, we calculate the following first:

Total liabilities = Total current liabilities + Bonds payable = $300,000 + $600,000 = $900,000

Income after taxes = Income before income taxes - Income taxes = $180,000 - $78,000 = $102,000

Preferred stock dividend = 5% * $600,000 = $30,000

Retained earnings for the year = Income after taxes - Preferred stock dividend = $102,000 - $30,000 = $72,000

Ending retained earnings = Beginning retained earnings + Retained earnings for the year = $420,000 + $72,000 = $492,000

Stockholders’ equity = Preferred 6% stock + Common stock + Premium on common stock + Ending retained earnings = $240,000 + $480,000 + $120,000 + $492,000 = $1,332,000

Therefore, the Stockholders’ equity to debt ratio is now calculated uisng the calculated figures as follows:

Stockholders’ equity to debt ratio = Stockholders’ equity / Total liabilities = $1,332,000 / $900,000 = 1.48

Therefore, Stockholders’ equity to debt ratio is 1.48.