Drake Company reported the following for 2017: Current assets............................................$87,000 Current liabilities..........................................19,000 Revenues.....................................................450,000 Cost of goods sold.....................................220,000 Noncurrent

Question:

Drake Company reported the following for 2017:

Current assets............................................$87,000

Current liabilities..........................................19,000

Revenues.....................................................450,000

Cost of goods sold.....................................220,000

Noncurrent assets.....................................186,000

Bonds payable (10%, issued at par).........100,000

Preferred stock, $5, $100 par......................20,000

Common stock, $10 par...............................50,000

Paid‐in capital in excess of par...................48,000

Operating expense......................................64,000

Retained earnings........................................36,000

Common stockholders received a $2 dividend during the year. The preferred stock is noncumulative and nonparticipating.

Required:

a. Ignoring income taxes, prepare an income statement and balance sheet for Drake Company at December 31, 2017, that is consistent with each of the following theories of equity:

i. Entity theory

ii. Proprietary theory

iii. Residual equity theory

b. For each theory cited above, compute the December 31, 2017, debt‐to‐equity ratio. If none would be computed, discuss why.

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