1. 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). (Words only.)

d. Suggest a solution and explain why it will qualify for accounting treatment that will avoid the problem highlighted in part (b). (Words only.)

Current assets $ 20 Fixed assets 130 Total assets $150 Caruthers Inc. Balance Sheet ($000) Current liabilities $ 15 Long-term debt 65 Equity Total liabilities & equity $150 70