The debt ratio is the ratio of total debt (which excludes accounts payable) to total assets. Total assets must equal total liabilities and equity. Yorktown’s total debt ratio was Total debt / Total assets = $9 / $57 = 0.158. If the franchise cost were amortized, retained earnings would increase by $8 million ($10 cost, less $10/5 = $2 million of amortization.) The debt ratio would decrease to $9 / ($57 + $8) = 0.138.
