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BSO, Inc., has assets of $680,000 and liabilities of $510,000 resulting in a debt-to-assets ratio of...

BSO, Inc., has assets of $680,000 and liabilities of $510,000 resulting in a debt-to-assets ratio of 0.75. For each of the following transactions, determine whether the debt-to-assets ratio will increase, decrease, or remain the same, and enter the value of the new debt-to-assets ratio. Each item is independent. (Round your answers to 2 decimal places.)
Debt-to-Assets Ratio
a. Purchased $36,000 of new inventory on credit.
b. Paid accounts payable in the amount of $74,000.
c. Recorded accrued salaries in the amount of $140,000.
d. Borrowed $290,000 from a local bank, to be repaid in 90 days.
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Answer #1

Existing assets = $680000, Existing debt = $510000, Existing debt assets ratio = 0.75.

(a) Purchase $36000 inventory on credit: It will increase the assets as inventory is coming in. It will also increase the liabilities / debt as a current liability to pay is created. Debt to assets ratio will also increase as per below.

New assets = $680000 + $36000 = $716000

New debt = $510000 + $36000 = $546000

New debt assets ratio = $546000 / $716000 = 0.76

So, debt assets ratio will increase.

(b) Paid accounts payable $74000: It will decrease the assets (as cash is paid) and liabilities / debt (as accounts payable are settled or decreased). It will also decrease the debt to assets ratio as per below:

New assets = $680000 - $74000 = $606000

New debt = $510000 - $74000 = $436000

New debt assets ratio = $436000 / $606000 = 0.72

So, debt assets ratio will decrease.

(c) Recorded accrued salaries $140000: Assets will remain same as there is no outgo of cash or any other asset. Also liabilities / debt will increase in the form of current liabilities. It will increase the debt to assets ratio as per below:

New assets = $680000

New debt = $510000 + $14000 = $524000

New debt assets ratio = $524000 / $680000 = 0.77

So, debt assets ratio will increase.

(d) Borrowed $290000 from a local Bank: It will increase the assets as cash is coming in the business and liabilities / debt is also increased as current liability to pay within 90 days is created. Debt to assets ratio will also increase as per below.

New assets = $680000 + $290000 = $970000

New debt = $510000 + $290000 = $800000

New debt assets ratio = $800000 / $970000 = 0.82

So, debt assets ratio will increase.

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