Question

E9-1 LO9-1, 9-4, 9-5 Identifying Current Liabilities, Computing Working Capital, and Explaining Working Capital Diane Corporation is preparing its year-end balance sheet. The company records show the following selected amounts at the end of the year: $530,000 362,000 Total assets Total noncurrent assets Liabilities: Notes payable (8%, due in 5 years) Accounts payable Income taxes payable Liability for withholding taxes Rent revenue collected in advance Bonds payable (due in 15 years) Wages payable Property taxes payable Note payable (10%, due in 6 months) Interest payable Common stock 15.000 56,000 14,000 3,000 7,000 90,000 7.000 3,000 12.000 400 100,000

Answer 1

Solution 1 Total Assets Total noncurrent Assets So, Total Current Assets 530000 A 362000 B 168000 A-B-C for C As Total Assets = Non Current Assets + Current Assets So, Current Assets = Total Assets - Non Current Assets Current Liabilities: Accounts Payable Income Taxes Payable Liability for withholding Taxes Rent Revenue collected in Advance Wages Payable Property Taxes Payable Notes Payable, 6 months Interest Payable Total Current Liabilities 56000 assumed all are due within a year 14000 3000 7000 7000 3000 12000 400 if assumed for short term instruments 102400 D Working Capital = Total Current Assets (-) Total Current Liabilities 168000 - 102400 65600 or, Working Capital Working Capital gets invested in the operating cycle of a business thus it is very important for day to day running of operations. A healthy Working Capital existence ensures no stoppage of operations and ability of business to meet any fluctuation in its regular demands. It is a measure for operating liquidity and helps determin ability to pay all short term expenses. Solution 2 No, working capital does not get affected by contingent liabilites as it is not a line item of Financial Statements and only a part of notes. Thus it does not affect the no. of Current Assets and Liabilities reported. It is required only for contingency reporting and becomes liability only on happening of future events which make it certain.