Chapter 13, Problem 14E

To determine

To Compute: the updated current ratio for each transaction of a company.

Explanation of Solution

Current ratio:

Current ratio is used to determine the relationship between current assets and current liabilities. Current ratio is determined by dividing current assets and current liabilities. The ideal current ratio is 2:1.

Formula:

$\begin{array}{l}\text{Current Ratio = }\frac{\text{Current Assets}}{\text{Curretn Liablilties}}\\ \end{array}$

Following is the prevailing current ratio:

$\begin{array}{c}\text{Current}\text{ratio=}\frac{\text{Current}\text{assets}}{\text{Current}\text{liabilities}}\\ \text{2}\text{.00=}\frac{\text{\$500,000}}{\text{x}}\\ \text{x=}\frac{\text{\$500,000}}{2.00}\\ \text{=\$250,000}\end{array}$

Transaction 1:

Following is the updated current ratio for the sale made on merchandise for $12,000 on short term credit for $15,000.

$\begin{array}{c}\text{Current}\text{ratio=}\frac{\text{Current}\text{asset}}{\text{Current}\text{liability}}\\ \text{=}\frac{\text{\$503,000(1)}}{\text{\$250,000}}\\ \text{= 2}\text{.01}\end{array}$

Hence, the updated current ratio for the sale made on merchandise for $12,000 on short term credit for $15,000 is 2.01.

Working note:

Calculate the value of updated current asset.

$\begin{array}{c}\text{Updated}\text{current}\text{asset}\text{value=}\left(\begin{array}{l}\text{Present}\text{value}\text{of}\text{current}\text{asset}\\ +\text{short term credit }-\text{Inventory}\end{array}\right)\\ \text{=\$500,000}+\text{\$15,000}-\$12,000\\ \text{=\$503,000}\end{array}$ (1)

Transaction 2:

Following is the updated current ratio for the declared but did not pay dividends of $50,000.

$\begin{array}{c}\text{Current}\text{}\text{ratio=}\frac{\text{Current}\text{asset}}{\text{Current}\text{liability}}\\ \text{=}\frac{\text{\$503,000}}{\text{\$300,000 (2)}}\\ \text{=1}\text{.68}\end{array}$

Hence, the updated current ratio for the declared but did not pay dividends of $50,000 is 1.68.

Working note:

Calculate the value of updated current liabilities.

$\begin{array}{c}\text{Updated}\text{current liabilities value=}\left(\begin{array}{l}\text{Present}\text{value}\text{of}\text{current}\text{liabilities}\\ +\text{Dividend}\end{array}\right)\\ \text{=\$250,000+\$50,000}\\ \text{=\$300,000}\end{array}$ (2)

Transaction 3:

Following is the updated current ratio for the paid rent amount of $12,000.

$\begin{array}{c}\text{Current}\text{}\text{ratio=}\frac{\text{Current}\text{asset}}{\text{Current}\text{liability}}\\ \text{=}\frac{\text{\$503,000}}{\text{\$300,000 }}\\ \text{=1}\text{.68}\end{array}$

Hence, the updated current ratio for the paid rent amount of $12,000 is 1.68.

Working note:

Calculate the value of updated current assets.

$\begin{array}{c}\text{Updated}\text{current}\text{asset}\text{value=}\left(\begin{array}{l}\text{Present}\text{value}\text{of}\text{current}\text{asset}\\ +\text{Cash }-\text{Prepaid}\end{array}\right)\\ \text{=\$503,000}+\text{\$12,000}-\$12,000\\ \text{=\$503,000}\end{array}$

Transaction 4:

Following is the updated current ratio for thepayment of previously declared dividends $50,000.

$\begin{array}{c}\text{Current}\text{}\text{ratio=}\frac{\text{Current}\text{asset}}{\text{Current}\text{liability}}\\ \text{=}\frac{\text{\$453,000 (3)}}{\text{\$250,000 (4) }}\\ \text{=1}\text{.81}\end{array}$

Hence, the updated current ratio for thepayment of previously declared dividends $50,000 is 1.81.

Working note:

Calculate the value of updated current assets.

$\begin{array}{c}\text{Updated}\text{current}\text{asset}\text{value=}\left(\begin{array}{l}\text{Present}\text{value}\text{of}\text{current}\text{asset}\\ +\text{Cash }\end{array}\right)\\ \text{=\$503,000}-\text{\$50,000}\\ \text{=\$453,000}\end{array}$ (3)

Calculate the value of updated current liabilities.

$\begin{array}{c}\text{Updated}\text{current liabilities value=}\left(\begin{array}{l}\text{Present}\text{value}\text{of}\text{current}\text{liabilities}\\ -\text{Payment of Dividend}\end{array}\right)\\ \text{=\$300,000-\$50,000}\\ \text{=\$250,000}\end{array}$ (4)

Transaction 5:

Following is the updated current ratio for the collected an account receivable in the amount of $12,000.

$\begin{array}{c}\text{Current}\text{}\text{ratio=}\frac{\text{Current}\text{asset}}{\text{Current}\text{liability}}\\ \text{=}\frac{\text{\$453,000 }}{\text{\$250,000 }}\\ \text{=1}\text{.81}\end{array}$

Hence, the updated current ratio for the collected an account receivable in the amount of $12,000 is 1.81.

Working note:

Calculate the value of updated current assets.

$\begin{array}{c}\text{Updated}\text{current}\text{asset}\text{value=}\left(\begin{array}{l}\text{Present}\text{value}\text{of}\text{current}\text{asset}\\ +\text{Cash }-\text{Accounts receivable}\end{array}\right)\\ \text{=\$453,000}+\text{\$12,000}-\$12,000\\ \text{=\$453,000}\end{array}$

Transaction 6:

Following is the updated current ratio for the reclassified of long –term debt as a current liability for $40,000.

$\begin{array}{c}\text{Current}\text{}\text{ratio=}\frac{\text{Current}\text{asset}}{\text{Current}\text{liability}}\\ \text{=}\frac{\text{\$453,000}}{\text{\$290,000 (5)}}\\ \text{=1}\text{.56}\end{array}$

Hence, the updated current ratio for the reclassified of long –term debt as a current liability for $40,000 is 1.56.

Working note:

Calculate the value of updated current liabilities.

$\begin{array}{c}\text{Updated}\text{current liabilities value=}\left(\begin{array}{l}\text{Present}\text{value}\text{of}\text{current}\text{liabilities}\\ +\text{Reclassifed long term debt}\end{array}\right)\\ \text{=\$250,000+\$40,000}\\ \text{=\$290,000}\end{array}$ (6)