Drake Company reported the following for 2014: Current assets................ $ 87,000 Current liabilities................ 19,000 Revenues................ 450,000 Cost

Question:

Drake Company reported the following for 2014:

Current assets................ $ 87,000

Current liabilities................ 19,000

Revenues................ 450,000

Cost of goods sold............ 220,000

Noncurrent assets............. 186,000

Bonds payable (10%, issued at par) .....100,000

Preferred stock, $ 5, $ 100 par .......20,000

Common stock, $ 10 par.......... 50,000

Paid- in capital in excess of par........ 48,000

Operating expenses............. 64,000

Retained earnings............. 36,000

Common stockholders received a $ 2 dividend during the year. The preferred stock is noncumulative and nonparticipating.

Required:

a. Ignoring income taxes, prepare an income statement and balance sheet for Drake Company at December 31, 2014, that is consistent with each of the following theories of equity:

i. Entity theory

ii. Proprietary theory

iii. Residual equity theory

b. For each theory cited above, compute the December 31, 2014, debt-to- equity ratio. If none would be computed, discuss why.

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