Question

Problem 13-3A Transactions, working capital, and liquidity ratios LO P3 Plum Corporation began the month of May with $1,200,000 of current assets, a current ratio of 2.10:1, and an acid-test ratio of 1.40:1 During the month, it completed the following transactions (the company uses a perpetual inventory system). May 2 Purchased $55,000 of merchandise inventory on credit. 8 Sold merchandise inventory that cost $55,000 for $125,000 cash. 10 Collected $30,000 cash on an account receivable. 15 Paid $31.000 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 59,000 shares of outstanding common stock. 26 Paid the dividend declared on May 22. 27 Borrowed $125,000 cash by giving the bank a 30-day, 105 note. 28 Borrowed $140,000 cash by signing a long-term secured note. 29 Used the $265,000 cash proceeds from the notes to buy new machinery.

Answer 1

Solution Working Capital Quick Acid-Test Current Current Current Transaction Assets Ratio Assets Liabilities Ratio $800,000 $571,429 $55,000 Beginning May 2 $1,200,000 $628,571 2.10 1.40 $55,000 $0 Balance $1,255,000 $125,000 ($55,000) $1,325,000 $30,000 ($30,000) $1,325,000 ($31,000) $800,000 $125,000 $626,429 $628,571 2.00 1.28 May 8 Balance May 10 $925,000 $30,000 $626,429 2,12 $698,571 1.48 ($30,000) Balance $925,000 $626,429 $698,571 2.12 1.48 ($31,000) ($31,000) May 15 Balance May 17 $1,294,000 $0 $894,000 $595,429 $698,571 2.17 1.50 $0 $698,571 Balance $1,294,000 $894,000 $595,429 2.17 1.50 $0 $59,000 May 22 $654,429 ($59,000) $1,294,000 ($59,000) Balance $894,000 $639,571 1.98 1.37 ($59,000) May 26 Balance $1,235,000 $125,000 $835,000 $595,429 $639,571 2.07 1.40 $125,000 $125,000 May 27 $1,360,000 $140,000 $960,000 $140,000 $720,429 1.33 Balance 1.89 $639,571 May 28 $1,500,000 ($265,000) $1,100,000 $779,571 Balance May 29 $720,429 2.08 1.53 ($265,000) $0 $720,429 Balance $835,000 $1,235,000 1.16 $514,571 1.71