Question

Presented here are the comparative balance sheets of Hames Inc. at December 31, 2020 and 2019. Sales for the year ended December 31, 2020, totaled $630,000.

HAMES INC. Balance Sheets December 31, 2020 and 2019
	2020					2019
Assets
Cash		$	20,000				$	21,000
Accounts receivable			78,000					72,000
Merchandise inventory			103,000					99,000
Total current assets		$	201,000				$	192,000
Land			50,000					40,000
Plant and equipment			125,000					110,000
Less: Accumulated depreciation			(65,000	)				(60,000	)
Total assets		$	311,000				$	282,000
Liabilities
Short-term debt		$	18,000				$	17,000
Accounts payable			64,400					76,000
Other accrued liabilities			20,000					18,000
Total current liabilities		$	102,400				$	111,000
Long-term debt			22,000					30,000
Total liabilities		$	124,400				$	141,000
Stockholders’ Equity
Common stock, no par, 100,000 shares authorized 40,000 and 25,000 shares issued, respectively		$	74,000				$	59,000
Retained earnings:
Beginning balance		$	82,000				$	85,000
Net income for the year			50,600					2,000
Dividends for the year			(20,000	)				(5,000	)
Ending balance		$	112,600				$	82,000
Total stockholders’ equity		$	186,600				$	141,000
Total liabilities and stockholders’ equity		$	311,000				$	282,000

Required:

1. Calculate the acid-test ratio at December 31, 2020. (Round your answer to 2 decimal places.)
2. Assume that on December 31, 2020, the treasurer of Hames decided to pay $15,000 of accounts payable. What impact, if any, this payment will have on the answers you calculated for parts a-d (increase, decrease, or no effect).
3. Assume that instead of paying $15,000 of accounts payable on December 31, 2020. Hames collected $15,000 of accounts receivable. What impact, if any, this receipt will have on the answers you calculated for parts a-d (increase, decrease, or no effect).

Answer 1

Acid-test ratio:	2020
Cash	$20,000
Accounts receivable	$78,000
Total Quick Assets (a)	$98,000
Short-term debt	$18,000
Accounts payable	$64,400
Other accrued liabilities	$20,000
Total Curren Liabilities (b)	$102,400
Acid-test ratio (a/b)	0.96
Acid-test ratio when it Pays $15,000 accounts payable:
Cash ($20,000 - $15,000)	$5,000
Accounts receivable	$78,000
Total Quick Assets (a)	$83,000
Short-term debt	$18,000
Accounts payable ($64,400 - $15,000)	$49,400
Other accrued liabilities	$20,000
Total Curren Liabilities (b)	$87,400
Acid-test ratio (a/b)	0.95
Impact on Acid-test ratio due to paying $15,000 to accounts payable is decrease of 0.10 (0.96 - 0.95).
Acid-test ratio when it collects $15,000 on accounts receivable:
Cash ($20,000 + $15,000)	$35,000
Accounts receivable ($78,000 - $15,000)	$63,000
Total Quick Assets (a)	$98,000
Short-term debt	$18,000
Accounts payable	$64,400
Other accrued liabilities	$20,000
Total Curren Liabilities (b)	$102,400
Acid-test ratio (a/b)	0.96
Impact on Acid-test ratio due to collecting $15,000 from accounts receivable is same as the orginal.