Chapter 13, Problem 11E

To determine

Introduction:

Current ratio is the ratio of current assets to current liabilities. An ideal current ratio is 2:1.The current assets are the assets which are convertible into cash within the period of 1 year and current liabilities are the liabilities which are paid off within in a year.

To calculate:

The new current ratio after considering the recent transactions.

Answer to Problem 11E

The updated current ratio is 1.63:1.

Explanation of Solution

Given:

Current assets = $54,000

Current ratio = 1.80:1

$\begin{array}{l}Currentratio=\frac{Current\text{}assets}{Currentliabilities}\\ \\ 1.80=\frac{\$54,000}{C.L.}\\ \\ C.L.=\$30,000\end{array}$

1. Merchandise purchased for $6,000 on account
Purchase of merchandise on account will increase the current assets as well as the current liabilities by the same amount.

New Values

Current Assets = $54,000 + $6,000 = $60,000

Current liabilities = $30,000 + $6,000 = $36,000

New ratio:

$\begin{array}{l}Currentratio=\frac{Current\text{}assets}{Currentliabilities}\\ \\ =\frac{\$60,000}{\$36,000}\\ \\ =1.66:1\end{array}$

1. Delivery truck purchased for $10,000 by paying $1,000 in cash and for the balanced amount signing a two years promissory note.

Purchasing a delivery truck is a part of fixed asset so it will not impact the current assets. However, part of cash payment made for the truck will reduce the current asset. Signing a promissory note for a period of more than one year is a part of non-current liability. Therefore, it will not have any impact on the current liabilities.

New values:

Current assets = $60,000 - $1,000 = $59,000

Current liabilities = $36,000

New ratio:

$\begin{array}{l}Currentratio=\frac{Current\text{}assets}{Currentliabilities}\\ \\ =\frac{\$59,000}{\$36,000}\\ \\ =1.63:1\end{array}$