Question Completion:
The accounts of Granger Services Inc. at January 31, 2016 are listed in alphabetical order:
Accounts payable $12,200
Accounts receivable 17,000
Accumulated depreciation – equipment 6,500
Advertising expense 11,300
Cash 17,400
Common Stock 5,300
Current portion: Long-term note payable 1,900
Depreciation expense – Equipment 1,900
Interest expense 500
Dividends declared 12,500
Equipment 42,000
Long-term note payable 16,000
Other long-term assets 13,700
Prepaid expense 5,900
Retained earnings, Jan 31, 2015 13,300
Salary expense 26,100
Salary payable 3,400
Service Revenue 95,000
Supplies 3,500
Supplies expense 4,600
Unearned Service revenue 2,800
At January 31, 2015, net working capital was $22,600, the current ratio was 1.90, and the debt ratio was 0.15.
Requirements as provided in the question
Answer:
Granger Services Inc.
a. Net Working Capital:
Current Assets - Current Liabilities
= $43,800 - 20,300
= $23,500
b. Current ratio:
Current assets / current liabilities
= $43,800/20,300
= 2.16
c. Debt Ratio:
Total Liabilities/Total Assets * 100
= $36,300/$93,000 * 100
= 0.39 or 39%
d) At January 31, 2016, net working capital was $23,500, the current ratio was 2.16, and the debt ratio was 0.39.
e) Grange's ability to pay both current and total debts improved marginally during the fiscal year with less current liabilities vis-a-vis the current assets and more long-term debts as can be discerned from the current ratio and debt ratio respectively.
f) Grange's debt position became weak in 2016 as its debts can be settled with 39% of the total assets as against 2015's 15%. This implies that whereas, 15% of the assets could settle the debts in 2015, Grange needed 39% of assets to settle debts in 2016. This is a deterioration for a company that does not want to be highly leveraged. Otherwise, it is an improvement in debt leverage.
Step-by-step explanation:
a) Data and Calculations:
Granger Services Inc. Trial Balance as of January 31, 2016:
Debit Credit
Cash $17,400
Accounts receivable 17,000
Prepaid expense 5,900
Supplies 3,500
Equipment 42,000
Accumulated
depreciation–equipment $6,500
Other long-term assets 13,700
Accounts payable 12,200
Unearned Service revenue 2,800
Salary payable 3,400
Current portion: Long-term note payable 1,900
Long-term note payable 16,000
Common Stock 5,300
Retained earnings, Jan 31, 2015 13,300
Dividends declared 12,500
Service Revenue 95,000
Advertising expense 11,300
Depreciation expense
– Equipment 1,900
Interest expense 500
Salary expense 26,100
Supplies expense 4,600
Total 156,400 156,400
Granger Services Income Statement for the year ended January 31, 2016:
Service Revenue $95,000
Expenses:
Advertising expense 11,300
Depreciation expense
– Equipment 1,900
Interest expense 500
Salary expense 26,100
Supplies expense 4,600 $44,400
Net Income $50,600
Retained earnings, January 31, 2015 13,300
Dividends declared (12,500)
Retained earnings, January 31, 2016 $51,400
Granger Balance Sheet as of January 31, 2016:
Assets:
Current Assets:
Cash $17,400
Accounts receivable 17,000
Prepaid expense 5,900
Supplies 3,500
Total Current Assets $43,800
Long-term Assets:
Equipment 42,000
Accumulated depreciation
– equipment 6,500 35,500
Other long-term assets 13,700
Total long-term assets $49,200
Total assets $93,000
Liabilities + Equity:
Current Liabilities:
Accounts payable $12,200
Unearned Service revenue 2,800
Salary payable 3,400
Current note payable 1,900
Total Current Liabilities $20,300
Long-term note payable 16,000
Common Stock 5,300
Retained earnings 51,400
Total shareholders' equity 56,700
Total Liabilities + Shareholders' Equity $93,000