Dunn Sporting Goods sells athletic clothing and footwear to retail customers. Dunn’s accountantindicates that the firm’s operating cycle averages 6 months. At December 31, 2019, Dunnhas the following assets and liabilities:a. Prepaid rent in the amount of $8,500. Dunn’s rent is $500 per month.b. A $9,700 account payable due in 45 days.c. Inventory in the amount of $46,230. Dunn expects to sell $38,000 of the inventory within3 months. The remainder will be placed in storage until September 2020. The items placedin storage should be sold by November 2020.d. An investment in marketable securities in the amount of $1,900. Dunn expects to sell $700of the marketable securities in 6 months. The remainder are not expected to be sold until2022.e. Cash in the amount of $1,050.f. An equipment loan in the amount of $60,000 due in March 2024. Interest of $4,500 is duein March 2020 ($3,750 of the interest relates to 2019, with the remainder relating to the first3 months of 2020).g. An account receivable from a local university in the amount of $2,850. The university haspromised to pay the full amount in 3 months.h. Store equipment at a cost of $9,200. Accumulated depreciation has been recorded on thestore equipment in the amount of $1,250.Required:1. Prepare the current asset and current liability portions of Dunn’s December 31, 2019, balancesheet.2. Compute Dunn’s working capital and current ratio at December 31, 2019.3. CONCEPTUAL CONNECTION As in investor or creditor, what do these ratios tell youabout Dunn’s liquidity?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Dunn Sporting Goods sells athletic clothing and footwear to retail customers. Dunn’s accountant
indicates that the firm’s operating cycle averages 6 months. At December 31, 2019, Dunn
has the following assets and liabilities:
a. Prepaid rent in the amount of $8,500. Dunn’s rent is $500 per month.
b. A $9,700 account payable due in 45 days.
c. Inventory in the amount of $46,230. Dunn expects to sell $38,000 of the inventory within
3 months. The remainder will be placed in storage until September 2020. The items placed
in storage should be sold by November 2020.
d. An investment in marketable securities in the amount of $1,900. Dunn expects to sell $700
of the marketable securities in 6 months. The remainder are not expected to be sold until
2022.
e. Cash in the amount of $1,050.
f. An equipment loan in the amount of $60,000 due in March 2024. Interest of $4,500 is due
in March 2020 ($3,750 of the interest relates to 2019, with the remainder relating to the first
3 months of 2020).
g. An account receivable from a local university in the amount of $2,850. The university has
promised to pay the full amount in 3 months.
h. Store equipment at a cost of $9,200. Accumulated depreciation has been recorded on the
store equipment in the amount of $1,250.
Required:
1. Prepare the current asset and current liability portions of Dunn’s December 31, 2019, balance
sheet.
2. Compute Dunn’s working capital and current ratio at December 31, 2019.
3. CONCEPTUAL CONNECTION As in investor or creditor, what do these ratios tell you
about Dunn’s liquidity?

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