Chapter 17, Problem 17.8EX

Current position analysis

The bond indenture for the 10-year, 9% debenture bonds issued January 2, 20Y5, required working capital of $100,000, a current ratio of 1.5, and a quick ratio of 1.0 at the end of each calendar year until the bonds mature. At December 31, 20Y6, the three measures were computed as follows:

1. Current assets:
Cash......................................		$102,000
Temporary investments....................		48,000
Accounts and notes receivable (net).........		120,000
Inventories................................		36,000
Prepaid expenses..........................		24,000
Intangible assets..........................		124,800
Property, plant, and equipment.............		55,200
Total current assets (net)................			$510,000
Current liabilities:
Accounts and short-term notes payable.....		$ 96,000
Accrued liabilities..........................		204,000
Total current liabilities..................			300,000
Working capital.............................			$210,000
2. Current ratio................................		1.7	$510,000 ÷ $300,000
3. Quick ratio..............................................		1.2	$115,200 ÷ $ 96,000

a. List the errors in the determination of the three measures of current position analysis.

b. Is the company satisfying the terms of the bond indenture? Explain.