The following information comes from the 2015 financial statements of Jessica Hatch Company: Total liabilities . .

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The following information comes from the 2015 financial statements of Jessica Hatch Company:

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,000

Total stockholders' equity . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 110,000

In addition, Jessica Hatch has a large number of operating leases. The future payments on these operating leases are disclosed in the notes to the financial statements as follows:

Year Payment

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 30,000

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 30,000

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 30,000

2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 30,000

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,000

All of these lease payments occur at the end of the year. The incremental borrowing rate of Jessica Hatch Company is 10%. This is also the implicit rate in all of the leases that Jessica Hatch signs.

1. Compute the debt-to-equity ratio (total liabilities/total equity).

2. Compute the debt ratio (total liabilities/total assets).

3. Assuming that Jessica Hatch's operating leases are accounted for as capital leases, compute the debtto-equity ratio.

4. Assuming that Jessica Hatch's operating leases are accounted for as capital leases, compute the debt ratio.

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
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Intermediate Accounting

ISBN: 978-1133957911

19th edition

Authors: Earl K. Stice, James D. Stice

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