ACCA Applied Knowledge · Financial Accounting · Ratios
Gamma Co's equity is $800,000 and its long-term debt is $400,000, so debt/equity gearing is 50%. Gamma then revalues land, crediting a $200,000 revaluation surplus, with no other changes. What is the debt/equity gearing afterwards?
Gearing falls to 40.0%. The $200,000 revaluation surplus increases equity from $800,000 to $1,000,000, while debt stays at $400,000. Debt divided by the higher equity figure gives 40%, so a revaluation lowers gearing.
- A40.0%Correct
- B50.0%
- C33.3%
- D60.0%
Explanation
The revaluation surplus is part of equity, so equity rises to $1,000,000. Debt is unchanged at $400,000, so gearing is $400,000 / $1,000,000 = 40.0%. Leaving gearing at 50% ignores the effect on equity; 33.3% would use debt/(debt+equity) with the original figures wrongly.
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