Justin Company has total assets, liabilities, and shareholders' equity of $38,000, $17,000, and $21,000, respectively, at the beginning of 2017. At the end of 2017, total assets, liabilities, and shareholders' equity were reported at $32,000, $13,000, and $19,000, respectively. How much additional debt can Justin Company incur and still have its debt/equity ratio remain less than or equal to 1.00?
A)$10,000
B)$25,000
C)$12,000
D)$24,000

Question

Quizplus · Accepted Answer

The debt/equity ratio is calculated as total liabilities divided by total shareholders' equity. At the end of 2017, Justin Company's debt/equity ratio is $13,000 / $19,000 = 0.684. To maintain a debt/equity ratio of less than or equal to 1.00, the maximum liabilities (debt) should not exceed the shareholders' equity. Since the shareholders' equity is $19,000, the company can incur up to $19,000 in total debt to maintain this ratio. Given it already has $13,000 in debt, it can incur an additional $6,000 ($19,000 - $13,000) to reach a debt/equity ratio of 1.00. However, none of the provided options match this calculation, indicating a possible misunderstanding in the question's setup or a mistake in the calculation. Based on the provided options and aiming to maintain a debt/equity ratio of less than or equal to 1.00, the closest correct approach would involve recalculating or reevaluating the given options and the calculation method.

Justin Company Has Total Assets, Liabilities, and Shareholders' Equity of $38,000