Winsome Company borrowed money from one of its major customers, Quirky, two years ago. The current balance of the liability is $100,000 (Winsome’s only liability), and the current balance of the accounts receivable that Quirky owes Winsome is $20,000. The total equity of Winsome is now $400,000. Winsome wants to offset the liability with the receivable and report a net liability in the financial statements. Will this proposal of Winsome, if carried out, have any effect on the debt-to-equity ratio of Winsome?
a. No.
b. Yes, it will decrease the debt-to-equity ratio of Winsome.
c. Yes, it will increase the debt-to-equity ratio of Winsome.
d. Yes, and Winsome’s proposal is appropriate under GAAP.
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