Question

Question 4

(20 marks)

John Tell created Tennis Rackets, a proprietorship, in 2015. Tennis Rackets produced a post-closing trial balance on December 31 2018, which included the following:

Tennis Rackets
Post-Closing Trial Balance
December 31, 2018
ACCOUNT	DEBIT	CREDIT
Cash	$ 30,000
Accounts Receivable	80,000
Supplies	5,000
Prepaid Insurance	6,000
Office Equipment	130,000
Accumulated Amortization, Office Equipment		$ 60,000
Building	300,000
Accumulated Amortization, Building		45,000
Land	400,000
Accounts Payable		49,000
Salary Payable		80,000
Unearned Service Revenue		25,000
Note Payable, Long Term		55,000
Mortgage Payable		450,000
John Tell, Capital		187,000
Total	$ 951,000	$ 951,000

Required:

1. Prepare a December 31, 2018 classified balance sheet for Tennis Rackets.
2. Calculate Tennis Rackets’ current ratio and debt ratio at December 31, 2018.

Note that 1 year ago, the current ratio was 1.25, and the debt ratio was 0.96. Did Tennis Rackets’ ability to pay debts improve or deteriorate during 2018?

Answer 1

Tennis Rackets
Balance Sheet
December 31,2018
Assets			Liabilities and Owners' Equity
Current Assets			Current Liabilities
Cash	$30,000		Accounts Payable	49,000
Accounts Receivable	80,000		Salary Payable	80,000
Supplies	5,000		Unearned Service Revenue	25,000
Prepaid Insurance	6,000		Total Current Iabilities		154,000
Total Current Assets		$121,000	Long term Liabilities
Fixed Assets			Note Payable, Long Term	55,000
Office Equipment	130,000		Mortgage Payable	450,000
Accumulated Amortization, Office Equipment	-60,000	$70,000	Total long term liabilities		505,000
Building	300,000		Total Liabilities		659,000
Accumulated Amortization, Building	-45,000	255,000	Owner's Equity
Land		400,000	John Tell, Capital		187,000
Total Assets		$846,000	Total Liabilities and Owners' Equity		846,000
	2018	2017
Current Ratio = Current Assets/Current Iiabilities	0.79	1.25
Debt Ratio = Total Liabilities/ Total assets	0.78	0.96
Tennis Rackets’ ability to pay debts has deteriorated during 2018. A decreasing trend in the current ratio may suggest a deteriorating liquidity position of the business. A decreasing trend in the Debt ratio suggest a reducing the financial leverage of the business.