At the beginning of the current year,Trenton Company's total assets were $248,000 and its total liabilities were $175,000.During the year,the company reported total revenues of $93,000,total expenses of $76,000 and owner withdrawals of $5,000.There were no other changes in owner's capital during the year and total assets at the end of the year were $260,000.Trenton Company's debt ratio at the end of the current year is:
A)70.6%.
B)67.3%.
C)32.7%.
D)48.6%.
E)1.42%.

Question

Quizplus · Accepted Answer

The formula for debt ratio is total liabilities divided by total assets.

At the beginning of the year: 
Debt ratio = $175,000 / $248,000 = 70.6%

At the end of the year: 
Total owner's equity = Total assets - Total liabilities 
Total owner's equity = $260,000 - $175,000 = $85,000

Total revenues - Total expenses - Owner withdrawals = Net income 
$93,000 - $76,000 - $5,000 = $12,000

Total owner's equity at the end of the year = Total owner's equity at the beginning of the year + Net income 
$85,000 = $248,000 x (1 - Debt ratio) + $12,000 
$85,000 = $248,000 - $248,000 x Debt ratio + $12,000 
$73,000 = $248,000 x Debt ratio 
Debt ratio = $73,000 / $248,000 = 29.43%

Therefore, the debt ratio at the end of the year is 29.43%, which corresponds to choice letter B.

At the Beginning of the Current Year,Trenton Company's Total Assets