Timberlake Company has total assets, liabilities, and shareholders' equity of $28,000, $15,000, and $21,000, respectively, at the beginning of 2010.At the end of 2010, total assets, liabilities, and shareholders' equity were reported at $24,000, $13,000, and $19,000, respectively.
-How much additional debt can Timberlake Company incur and still have its debt/equity ratio remain less than or equal to 1.00?
A) $6,000
B) $25,000
C) $12,000
D) $24,000

Question

Quizplus · Accepted Answer

A.Debt/equity ratio = Average total liabilities / Average total shareholders' equity
= (($15,000 + $13,000)/2) / (($21,000 + $19,000)/2) = .70
Average total liabilities can increase up to $20,000 and still maintain a debt/equity ratio of 1.0.In order to make the numerator equal to $20,000, the ending debt could increase up to $25,000:
Average total liabilities = ($15,000 + $25,000)/2 = $20,000
Since total debt at the end of 2010 is $13,000, the increase in debt could be up to $12,000 ($25,000 less $13,000).

Timberlake Company Has Total Assets, Liabilities, and Shareholders' Equity of $28,000