Caruthers Inc. is a small manufacturing firm and has the following summarized balance sheet.

The firm is interested in acquiring a fleet of 10 company cars for its sales staff. The cars have an economic life of seven years, but Caruthers plans to keep them for only three because it doesn€™t want its salespeople driving around in old vehicles. The cars cost $20,000 each, and Caruthers is considering borrowing to purchase them.
a. Restate Caruthers€™s balance sheet after the loan is made.
b. Calculate the firm€™s debt ratio now and immediately after the loan is made.
c. Comment on the change in part (b).
d. Suggest a solution and explain why it will qualify for accounting treatment that will avoid the problem highlighted in part(b).

Transcribed Image Text:

Caruthers Inc. Balance Sheet (S000) Current assets Fixed assets Total assets $ 20 130 $150 Current liabilities Long-term debt Equity Total liabilities & equity S 15 65 70 $150