Calculate 's net working capital, current ratio, and debt ratio at 31, , rounding to two decimal places. At 31, , net working capital was , the current ratio was , and the debt ratio was . Did 's ability to pay both current and total debts improve or deteriorate during the fiscal year? Evaluate 's debt position as strong or weak and give your reason.

Question Completion:

The accounts of Granger Services Inc. at January 31, 2016 are listed in alphabetical order:

Accounts payable $12,200

Accounts receivable 17,000

Accumulated depreciation – equipment 6,500

Advertising expense 11,300

Cash 17,400

Common Stock 5,300

Current portion: Long-term note payable 1,900

Depreciation expense – Equipment 1,900

Interest expense 500

Dividends declared 12,500

Equipment 42,000

Long-term note payable 16,000

Other long-term assets 13,700

Prepaid expense 5,900

Retained earnings, Jan 31, 2015 13,300

Salary expense 26,100

Salary payable 3,400

Service Revenue 95,000

Supplies 3,500

Supplies expense 4,600

Unearned Service revenue 2,800

At January 31, 2015, net working capital was $22,600, the current ratio was 1.90, and the debt ratio was 0.15.

Requirements as provided in the question

Granger Services Inc.

a. Net Working Capital:

Current Assets - Current Liabilities

= $43,800 - 20,300

= $23,500

b.  Current ratio:

Current assets / current liabilities

= $43,800/20,300

= 2.16

c. Debt Ratio:

Total Liabilities/Total Assets * 100

= $36,300/$93,000 * 100

= 0.39 or 39%

d) At January 31, 2016, net working capital was $23,500, the current ratio was 2.16, and the debt ratio was 0.39.

e) Grange's ability to pay both current and total debts improved marginally during the fiscal year with less current liabilities vis-a-vis the current assets and more long-term debts as can be discerned from the current ratio and debt ratio respectively.

f) Grange's debt position became weak in 2016 as its debts can be settled with 39% of the total assets as against 2015's 15%.  This implies that whereas, 15% of the assets could settle the debts in 2015, Grange needed 39% of assets to settle debts in 2016.  This is a deterioration for a company that does not want to be highly leveraged.  Otherwise, it is an improvement in debt leverage.

Explanation:

a) Data and Calculations:

Granger Services Inc. Trial Balance as of January 31, 2016:

                                                  Debit           Credit

Cash                                        $17,400

Accounts receivable                 17,000

Prepaid expense                       5,900

Supplies                                     3,500

Equipment                               42,000

Accumulated

depreciation–equipment                             $6,500

Other long-term assets          13,700

Accounts payable                                         12,200

Unearned Service revenue                           2,800

Salary payable                                                3,400

Current portion: Long-term note payable     1,900

Long-term note payable                              16,000  

Common Stock                                              5,300

Retained earnings, Jan 31, 2015                 13,300

Dividends declared                12,500

Service Revenue                                        95,000

Advertising expense               11,300

Depreciation expense

– Equipment                            1,900

Interest expense                        500

Salary expense                      26,100

Supplies expense                   4,600

Total                                       156,400      156,400

Granger Services Income Statement for the year ended January 31, 2016:

Service Revenue                               $95,000

Expenses:

Advertising expense               11,300

Depreciation expense

– Equipment                            1,900

Interest expense                        500

Salary expense                      26,100

Supplies expense                   4,600    $44,400

Net Income                                          $50,600

Retained earnings, January 31, 2015    13,300

Dividends declared                               (12,500)

Retained earnings, January 31, 2016  $51,400

Granger Balance Sheet as of January 31, 2016:

Assets:

Current Assets:

Cash                                        $17,400

Accounts receivable                 17,000

Prepaid expense                       5,900

Supplies                                     3,500

Total Current Assets                               $43,800

Long-term Assets:

Equipment                42,000

Accumulated depreciation

 – equipment            6,500   35,500

Other long-term assets          13,700

Total long-term assets                           $49,200

Total assets                                            $93,000

Liabilities + Equity:

Current Liabilities:

Accounts payable                $12,200

Unearned Service revenue    2,800

Salary payable                         3,400

Current note payable              1,900

Total Current Liabilities                           $20,300

Long-term note payable                            16,000  

Common Stock                      5,300

Retained earnings                51,400

Total shareholders' equity                       56,700

Total Liabilities + Shareholders' Equity $93,000

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