Gates,Inc.and Markham,Inc.each had the same financial position on January 1,Year 2.The following is a summary of each of their balance sheets on that date:

Gates is about to raise $200,000 in cash by issuing bonds.Markham is going to raise $200,000 on the same day by issuing common stock.Immediately after these transactions,which of the following statements will be correct?
A)Gates' current ratio will be higher than Markham's.
B)Gates' current ratio will be lower than Markham's.
C)Gates' debt to asset ratio will be higher than Markham's.
D)Gates' debt to asset ratio will be lower than Markham's.

Question

Gates,Inc.and Markham,Inc.each had the same financial position on January 1,Year 2.The following is a summary of each of their balance sheets on that date:

Gates is about to raise $200,000 in cash by issuing bonds.Markham is going to raise $200,000 on the same day by issuing common stock.Immediately after these transactions,which of the following statements will be correct?
A)Gates' current ratio will be higher than Markham's. 
B)Gates' current ratio will be lower than Markham's. 
C)Gates' debt to asset ratio will be higher than Markham's. 
D)Gates' debt to asset ratio will be lower than Markham's.

Quizplus · Accepted Answer

When Gates issues bonds,both assets and liabilities will increase by the same amount.Assuming debt was lower than assets before the bond issuance,Gates' debt-to-assets ratio will go up.When Markham issues common stock,assets and stockholders' equity will increase.This will cause Markham's debt-to-assets ratio to go down.

Gates,IncAnd Markham,Inc