Selected financial data for Rescue Rooter are presented below:
$\begin{array}{lrr}&\text { Year } 2&\text { Year } 1\
\text { Total liabilities } & \$ 1,205,000 & \$ 952,000 \
\text { Common shares } & 250,000 & 225,000 \
\text { Paid-in capital in excess of par - common shares } & 150,000 & 135,000 \
\text { Retained earnings } & 155,000 & 145,000
\end{array}$
-Refer to the figure Rescue Rooter.What does the Rescue Rooter's debt-to-equity ratio for Year 2 indicate?

Question

Selected financial data for Rescue Rooter are presented below:
 $\begin{array}{lrr}&\text { Year } 2&\text { Year } 1\
\text { Total liabilities } & \$ 1,205,000 & \$ 952,000 \
\text { Common shares } & 250,000 & 225,000 \
\text { Paid-in capital in excess of par - common shares } & 150,000 & 135,000 \
\text { Retained earnings } & 155,000 & 145,000
\end{array}$
-Refer to the figure Rescue Rooter.What does the Rescue Rooter's debt-to-equity ratio for Year 2 indicate?

Quizplus · Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by shareholders' equity. For Year 2, shareholders' equity is the sum of common shares, paid-in capital in excess of par, and retained earnings, which equals $555,000. The total liabilities are $1,205,000. Thus, the debt-to-equity ratio for Year 2 is $1,205,000 / $555,000, which is higher than Year 1's ratio, indicating an increase in leverage. This could be a concern as it means the company is relying more on debt to finance its operations.

Selected Financial Data for Rescue Rooter Are Presented Below -Refer to the Figure Rescue Rooter