Q45. Review of solvency ratios

Calculate the following solvency ratios based on the information below:

(1) Debt to equity ratio

(2) Debt to assets ratio

(3) Long-term debt to assets ratio

(4) Times interest earned ratio

(5) Assets to equity ratio

Current liabilities = $300,000

Long-term liabilities = $1,500,000

Total liabilities = $1,800,000

Total stockholders’ equity = $1,200,000

Total assets = $3,000,000

Average stockholders’ equity = $1,100,000

Average total assets = $2,750,000

Net income = $350,000

Interest expense = $50,000

Tax expense = $125,000

Earnings before interest and taxes (EBIT) = $525,000

A45.

(1) Debt to equity ratio

= Total liabilities / Total stockholders’ equity

= $1,800,000 / $1,200,000 = 1.5

(2) Debt to assets ratio

= Total liabilities / Total assets

= $1,800,000 / $3,000,000 = 0.6

(3) Long-term debt to assets ratio

= Long-term liabilities / Total assets

= $1,500,000 / $3,000,000 = 0.5

(4) Times interest earned ratio

= Earnings before interest and taxes (EBIT) / Interest expense

= (Net income + Interest expense + Tax expense) / Interest expense

= ($350,000 + $50,000 + $125,000) / $50,000

= $525,000 / $50,000 = 10.5

(5) Assets to equity ratio

= Average total assets / Average stockholders’ equity

= $2,750,000 / $1,100,000 = 2.5

© AccountingInfo.com