Question

E2-36. Preparing Balance Sheets, Computing Income, and Applying the Current and Quick Ratios LO1, 5, 7 Balance sheet information for Lang Services at the end of 2014 and 2015 is December 31, 2015 December 31, 2014 Accounts receivable. . . $22,800 1,800 10,000 32,000 4,700 25,000 $17,500 1,600 8,000 27,000 4,200 25,000 Supplies . .. a. Prepare its balancesheet for December 31 of each year. b. Lang Services raised $5,000 cash through issuing additional common stock early in 2015, and it declared and paid a $17,000 cash dividend in December 2015. Compute its net income or loss for 2015. Calculate the current ratio and quick ratio for 2015. Assume the industr on Lang's current and quick ratios relative to the industry. c. d. y average is 1.5 for the current ratio and 1.0 for the quick ratio. Comment

I don't know how to do this question. It is E2-36 A-D

Answer 1

Answer (a):

Balance sheet for December 31 for both years are given below:

Stockholders' equity = Total assets - Total liabilities

Stockholders' equity for 2015 = $69,500 - $26,800 =$42,700

Stockholders' equity for 2014 = $56,700 - $26,600 =$30,100

Answer (b):

As calculated in answer (a) above:

Stockholders equity in 2014 = $30,100

Given:

1. In early 2015, cash of $5,000 is raised through additional common stock

2. In December 2015, dividend of $17,000 is declared and paid

As calculated in answer (a) above:

Stockholders equity in 2015 = $42,700

Retention in year 2015 = $42,700 - ($30,100 + $5,000) = $7,600

As such Net Income of 2015 = Retention + Dividend paid = $7,600 + $17,000 = $24,600

Net Income of 2015 = $24,600

Answer (c):

Current ratio = Current assets / Current liabilities

Assuming notes payable as current liabilities:

Current ratio for 2015 = $37,500 /$26,800 = 1.40

Current ratio for 2014 = $29,700 /$26,600 = 1.12

Quick ratio = (Cash + Account Receivable) / Current Liabilities

Quick ratio for 2015 = ($10,000 + $22,800) /$26,800 = 1.22

Current ratio for 2014 = ($8,000 + $17,500) /$26,600 = 0.96

Answer (d):

Current ratio (Industry average) = 1.5

Quick ratio (Industry average) = 1.0

Comments on current ratio: Lang's current ratios for both 2014 and 2015 are lower than Industry average but Lang is improving on this in 2015 as compared to 2014. Lang needs to evaluate and further improve on current ratio to improve liquidity position.

Comments on quick ratio: Although Lang's quick ratio was lower than industry average in 2014, it has improved its quick ratio in 2015 and in 2015 its quick ratio is better than the industry average.