A Florida contractor has total liabilities of $720,000 and owner's equity of $480,000. What debt-to-equity ratio is indicated?
Correct Answer
D) 1.50 to 1
Debt-to-equity is liabilities divided by equity: $720,000 / $480,000 = 1.50.
Why This Is the Correct Answer
Debt-to-equity is liabilities divided by equity: $720,000 / $480,000 = 1.50.
Why the Other Options Are Wrong
Option A: 0.67 to 1
0.67 to 1 is below the supported result for debt-to-equity ratio; it likely uses the wrong base, period, or account bucket.
Option B: 1.20 to 1
1.20 to 1 is below the supported result for debt-to-equity ratio; it likely uses the wrong base, period, or account bucket.
Option C: 1.33 to 1
1.33 to 1 is below the supported result for debt-to-equity ratio; it likely uses the wrong base, period, or account bucket.
Memory Technique
Liabilities and divided live in different drawers; Lender Reviewing tells which opens.
Reference Hint
Open-book path: tab Builder's Guide to Accounting, 2001 to Section Three, Financial Ratios, Balance Sheet Ratios; use the job ledger figures in the stem and recompute the same accounting measure.
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