Question

Current Ratio, Debt Ratio, and Earnings per Share Selected items from successive annual reports of Middlebrook, Inc., appear as follows. Year 2 Year 1 Total assets (40% of which are current) $400,000 $325,000 Current liabilities $ 80,000 $100,000 Bonds payable, 12% 100,000 50,000 Capital stock, $5 par value 100,000 100,000 Retained earnings 120,000 75,000 Total liabilities & stockholders’ equity $400,000 $325,000 Dividends of $16,000 were declared and paid in year 2. Compute the following: a. Current ratio for year 2 and year 1. b. Debt ratio for year 2 and year 1. c. Earnings per share for year 2.

Answer 1

Answer:

Current Ratio: 1.30 in Year 1 & 2.00 in Year 2

Debt Ratio: 46% in Year 1 & 46.2% in Year 2

Earnings per share in Year 2 is $2.25 per share

Explanation:

Current Ratio = Current Assets ÷ Current Liabilities

Year 2 – Current Ratio = ($400,000 × 40%) ÷ $80,000 = 2.00

Year 1 – Current Ratio = ($325,000 × 40%) ÷ $100,000 = 1.30

Debt Ratio = Total Debt ÷ Total Assets

Year 2 – Debt Ratio = ($80,000 + $100,000) ÷ $400,000 = 45.0%

Year 1 – Debt Ratio = ($100,000 + $50,000) ÷ $325,000 = 46.2%

Earnings per Share = Earnings ÷ Number of Shares Outstanding

Earnings in Year 2 = Retained Earnings in Year 2 – Retained Earnings in Year 1

Earnings in Year 2 = $120,000 - $75,000 = $45,000

Number of Shares Outstanding = Share Capital ÷ Par value per share  

Number of Shares Outstanding = $100,000 ÷ $5 per share = 20,000 shares

Earnings per Share in Year 2 = $45,000 ÷ 20,000 shares = $2.25 per share