Question

Plum Corporation began the month of May with $1,000,000 of current assets, a current ratio of 2.10:1, and an acid-test ratio of 1.60:1. During the month, it completed the following transactions (the company uses a perpetual inventory system).

May		2		Purchased $75,000 of merchandise inventory on credit.
		8		Sold merchandise inventory that cost $55,000 for $130,000 cash.
		10		Collected $22,000 cash on an account receivable.
		15		Paid $24,500 cash to settle an account payable.
		17		Wrote off a $5,000 bad debt against the Allowance for Doubtful Accounts account.
		22		Declared a $1 per share cash dividend on its 60,000 shares of outstanding common stock.
		26		Paid the dividend declared on May 22.
		27		Borrowed $100,000 cash by giving the bank a 30-day, 10% note.
		28		Borrowed $120,000 cash by signing a long-term secured note.
		29		Used the $220,000 cash proceeds from the notes to buy new machinery.

Complete the table below showing Plum's (1) current ratio, (2) acid-test ratio, and (3) working capital after each transaction. (Do not round intermediate calculations. Round your ratios to 2 decimal places and the working capitals to nearest dollar amount. Subtracted amount should be indicated with a minus sign.)

Current Liabilities Current Quick Assets Current Ratio Acid-Test Ratio Working Capital Transaction Assets $ 761,905 $ 523,810 $ Beginning 1,000,000 476,190 2.10 1.60 75,000 75,000 May 2 1,075,000 551,190 Balance May 8 Balance May 10 Balance May 15 Balance May 17 Balance May 22 Balance May 26 Balance 1.52 May 27 Balance May 28 Balance 1.64 May 29 Balance

Answer 1

Answer :-

Computation of Plum's (1) current ratio, (2) acid-test ratio, and (3) working capital after each transaction.

Transaction		Current Assets	Quick Asset	Currenr Liabilities	Current Ratio = (Current Asset /Current liabilities)	Acid Test Ratio = (Quick Assets / Current liabilities)	Working capital = Current assets - Current liabilities	Notes
Beginning		$1,000,000	$761,900	$476,190	2.10	1.60	$523,810	Increased in Current Assets and Current liabilities because Inventory purchase on credit .When inventory purchase it increases inventary in current Asset andaccount payable in liabilities increase as it purchase on credit.
May 2		$75,000	0	$75,000
Balance		1,075,000	761,000	551,190	1.95	1.38	523,810	When Inventory sold It increase Cash and Reduced inventory . When Cash increase Current and Quick assets increases and Current assets decrease with the amount of inventory at cost.
May 8		130,000	130,000	0
		(55,000)
Balance		1,150,000	891,900	551,190	2.09	1.62	598,810	When money is collected from account receivable then account receivable decrease and cash increase .As a result Current and Quick assets first increase as cash increase and decrease as Account receivable decrease.
May 10		22,000	22,000
		(22,000)	(22,000)
Balance		1,150,000	891,900	551,190	2.09	1.62	598,810	Paid to Account Payable results in decrease of cash and Account Payable.Thus, Current and Quick assets decrease as Cash decrease and Current liabilities decrease as Account Payable decrease.
May 15		(24,500)	(24,500)
				(24,500)
Balance		1,125,500	867,400	526,650	2.14	1.65	598,850	No Effect on Current Assets, Quick assets and Current liabilities.
May 17		0	0	0
Balance		1,125,500	867,400	526,690	2.14	1.65	598,850	No Effect as Dividend is only declared on Current Assets and Quick assets only Current liabilities increase with Declared Dividend
May 22		0	0	60,000
Balance		1,125,500	867,400	586,690	1.92	1.48	538,810	Paid the Dividend will reduce the cash and Current liabilities.
May 26		(60000)	(60,000)
				(60,000)
Balance		1,065,500	807,400	526,690	2.02	1.53	538,810	Borrowed $100,000 cash by giving the bank a 30-day, 10% note As a result Cash increase which increases Quick and Current assets. Current Liabilities increase as Note payable increase.
May 27		100,000	100,000
				100,000
Balance		1,165,500	907,400	626,690	1.86	1.45	538,810	Borrowed cash by signing a long-term secured note it mean caah genrated by issuing long term note so there is no effect on current liabilities only cash increases which result in Current and Quick Asset
May 28		120,000	120,000	0
Balance		1,285,500	1,027,400	626,690	2.05	1.64	658,810	When New machinery purchased it Increases Fixed asset and reduced Cash. When Cash decreased then Current and Quick Asset decrease.
May 29		(220,000)	(220,000)
Balance		1,065,500	807,400	626,690	1.70	1.29	438,810