Question

Selected items from successive annual reports of Middlebrook, Inc., appear as follows.

	Year 2				Year 1
Total assets (40% of which are current)	$	493,000			$	333,000
Current liabilities	$	80,000			$	100,000
Bonds payable, 12%		100,000				50,000
Capital stock, $5 par value		100,000				100,000
Retained earnings		213,000				83,000
Total liabilities & stockholders' equity	$	493,000			$	333,000

   

Dividends of $16,000 were declared and paid in year 2.

a. Compute the current ratio for year 2 and year 1. (Round your answers to 1 decimal place.)

b. Compute the debt ratio for year 2 and year 1. (Round your percentage answers to nearest whole percent. i.e. 0.1234 as 12%.)

c. Compute the earnings per share for year 2. (Round your answer to 2 decimal places.)

Answer 1

Ans. A	Current ratio   =   Total current assets / Total current liabilities
	Year 2	$197,200 / $80,000	2.5 : 1
	Year 1	$133,200 / $100,000	1.3 : 1
	*Calculations:
	Current assets = Total assets * 40%
	Year 2	$493,000 * 40%	$197,200
	Year 1	$333,000 * 40%	$133,200
Ans. B	Debt ratio = Total debt / Total assets * 100
	Year 2	$180,000 / $493,000 * 100	37%
	Year 1	$150,000 / $333,000 * 100	45%
	*Calculations:
		Year 2	Year 1
	Current liabilities	$80,000	$100,000
	Bonds payable	$100,000	$50,000
	Total debt	$180,000	$150,000
Ans. C	Earnings per share = Net income / Common stock outstanding
	$146,000 / 20,000
	$7.30	per share
	*Calculations:
	Particulars	Amount
	Ending retained earnings	$213,000
	Add: Dividends paid	$16,000
	Less: Beginning retained earnings	-$83,000
	Net income	$146,000
	*Common stock outstanding =   Capital stock / Par value
	$100,000 / $5
	20,000 shares