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, $1,460,000; prepaid expenses, $520,000; long-term assets, $2,500,000; and shareholders’ equity, $2,600,000. 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.)

current liabilities?

Long term liabilities?

Accounts Receivable?

The acid-test ratio?

Answer 1

Answer:

(i)

Debt to equity ratio = Total liabilities/Equity

1.5 = Total liabilities/2,600,000

Total liabilities = $3,900,000

(ii)

Total assets = Total liabilities + Equity

= 3,900,000 + 2,600,000

= $6,500,000

(iii)

Total assets = Current assets + Long term assets

6,500,000 = Current assets + 2,500,000

Current assets = $4,000,000

(iv)

Current assets = Cash + Accounts receivable + Prepaid expenses

4,000,000 = 1,460,000 + Accounts receivable + 520,000

Accounts receivable = $2,020,000

(v)

Current ratio = Current assets/Current liabilities

2.5 = 4,000,000/Current liabilities

Current liabilities = $1,600,000

(vi)

Total liabilities = Current liabilities + Long term liabilities

3,900,000 = 1,600,000 + Long term liabilities

Long term liabilities = $2,300,000

(vii)

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

= (1,460,000 + 2,020,000)/1,600,000

=3,480,000/1,600,000

= 2.175

1	Current liabilities	$1,600,000
2	Long term liabilities	$2,300,000
3	Accounts receivable	$2,020,000
4	Acid test ratio	2.175