Lesson 23

Question 1

Long term debt that matures within one year should be reported as what on the balance sheet.

Answer 1

A current liability

Question 2

What does the debt to assets ratio do?

Answer 2

it measures the percentage of the total assets provided by creditors. The higher the percentage the greater the risk that the company will be unable to meet its maturing obligations.

Question 3

Debt to assets ratio

Answer 3

Total liabilities / Total assets

Question 4

What does the times interest earned ratio do?

Answer 4

it indicates the company’s ability to meet interest payments as they come due. A ratio of less than one indicates that the business might not be able to pay its interest expense.

Question 5

Times interest earned formula

Answer 5

(Net income + Interest expense + Income tax expense) / interest expense

Question 6

How should long-term debt that matures within one year and is to be converted into stock be reported?

Answer 6

As noncurrent and accompanied with a note explaining the method to be used in its liquidation

Long-term debt that matures within one year should be reported as a current liability, unless using noncurrent assets to accomplish redemption. If the company plans to refinance debt, convert it into stock, or retire it from a bond retirement fund, it should continue to report the debt as noncurrent. However, the company should disclose the method it will use in its liquidation.