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, $1,320,000; prepaid expenses, $380,000; long-term assets, $2,600,000; and shareholders’ equity, $2,700,000. The current ratio at the end of the year was 2.5 and the debt to equity ratio was 1.5.

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

Total liabilities / Equity = 1.5

Total liabilities = 1.5 X $2,700,000 = $4,050,000

Total liabilities + Equity = Total assets

$4,050,000 + $2,700,000 = $6,750,000

Current assets = Total assets - Long term assets

= $6,750,000 - $2,600,000

= $4,150,000

Accounts receivable = Current assets - Cash - Prepaid expenses

= $4,150,000 - $1,320,000 - $380,000

= $2,450,000

Current liabilities = Current assets / Current ratio

= $4,150,000 / 2.5

= $1,660,000

Long term liabilities = Total liabilities - Current liabilities

= $4,050,000 - $1,660,000

= $2,390,000

Quick assets = Cash + Accounts receivable

= $1,320,000 + $2,450,000

= $3,770,000

Acid test ratio = Quick assets / Current liabilities

= $3,770,000 / $1,660,000

= 2.3

1.	Current liabilities	$1,660,000
2.	Long term liabilities	$2,390,000
3.	Accounts receivable	$2,450,000
4.	The acid test ratio	2.3