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Spartan Sportswear's current assets consist of cash, marketable securities, accounts receivable, and inventories. The following data...

Spartan Sportswear's current assets consist of cash, marketable securities, accounts receivable, and inventories. The following data were abstracted from a recent financial statement: Inventories $ 180,000

Total assets $ 840,000

Current ratio 3.50

Acid-test ratio 2.00

Debt to equity ratio 1.80

Required:

Compute the long-term liabilities for Spartan:

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Answer #1

Computation of Spartan Long term liability -

current ratio = current assets/ current liabilities

3.50 = x/current liabilities --------------------equation 1

Acid-test ratio = (current assets - inventory) / current liabilities

2 = (x - 180000)/current liabilities ------------------------equation (2)

divide equation no. 1 by equation no. 2

3.50/2 = x/current liabilties/(x-180000)/current liabilities

3.50/2 = x/(x-180000)

cross multiply

3.50*(x-180000) = 2x

3.50x - 630000 = 2x

1.50x = 630000

x = $ 420000

now put x = $ 420000 in equation no. 1

3.50 = 420000/current liabilities

current liabilities = 420000/3.5

= 120000

formula for, Debt equity ratio = Long term debt/shareholder's equity

now suppose long term debt = a

so by the accounting equation, equity + long term debt + short term debt = Total Assets

shareholder equity = Total assets - long term debt - short term debt

= 840000 - a - 120000

= 720000 - a

put all values in above formula

1.80 = a/(720000-a)

1.80*720000 - 1.80*a = a

1296000 = 2.8a

a = 1296000/2.8

= 462857.1

long term liabilities for spartan = $ 462857.1

Please check with your answer and let me know.

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