Question

The current asset section of Guardian Consultant's balance sheet consists of cash, accounts receivable, and prepaid expenses. The 2021 balance sheet reported the following: cash, $1,350,000; prepaid expenses, $410,000; long-term assets, $2,900,000; and shareholders' equity, $3,000,000. The current ratio at the end of the year was 2.6 and the debt to equity ratio was 1.7. Required: Determine the following 2021 amounts and ratios: (Round your "The acid-test ratio" answer to 1 decimal place.) 1. Current liabilities 2. Long-term liabilities 3. Accounts receivable 4. The acid-test ratio

Answer 1

(i)

Debt to equity ratio = Total liabilities/Equity

1.7 = Total liabilities/3,000,000

Total liabilities = $5,100,000

(ii)

Total assets = Total liabilities + Equity

= 5,100,000 + 3,000,000

= $8,100,000

(iii)

Total assets = Current assets + Long term assets

8,100,000 = Current assets + 2,900,000

Current assets = $5,200,000

(iv)

Current assets = Cash + Accounts receivable + Prepaid expenses

5,200,000 = 1,350,000 + Accounts receivable + 410,000

Accounts receivable = $3,440,000

(v)

Current ratio = Current assets/Current liabilities

2.6 = 5,200,000/Current liabilities

Current liabilities = $2,000,000

(vi)

Total liabilities = Current liabilities + Long term liabilities

5,100,000 = 2,000,000 + Long term liabilities

Long term liabilities = $3,100,000

(vii)

Acid test ratio = (Cash + Accounts receivable)/Current liabilities

= (1,350,000 + 3,440,000)/2,000,000

= 4,790,000/2,000,000

= 2.4

1	Current liabilities	$2,000,000
2	Long term liabilities	$3,100,000
3	Accounts receivable	$3,440,000
4	Acid test ratio	2.4

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