Bellworth Limited has ordinary share capital of 6 000 000 shares of 25p each.Its retained earnings brought forward at 1 January 20X4 totalled £3 420 000 and the company made a loss of £300 000 in the year ended 31 January 20X4.The company's long-term borrowings remained the same throughout the 20X4 financial year at £1 800 000. What was the company's gearing ratio (calculated as debt as a percentage of equity) at 31 December 20X4 (to one decimal place)?

Question

Quizplus · Accepted Answer

The company's equity at 1 January 20X4 is:
6,000,000 shares x £0.25 = £1,500,000
Retained earnings brought forward = £3,420,000
Total equity = £4,920,000

The company's total equity at 31 December 20X4 is:
Equity at 1 January 20X4 + Loss for the year ended 31 January 20X4
= £4,920,000 - £300,000
= £4,620,000

The company's debt at 31 December 20X4 is:
Long-term borrowings = £1,800,000

Therefore, the gearing ratio at 31 December 20X4 is:
Debt/Equity x 100%
= (£1,800,000/£4,620,000) x 100%
= 39.0%

Bellworth Limited Has Ordinary Share Capital of 6 000 000