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, $1,470,000; prepaid expenses, $530,000; 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 < Prev ere to searc 23 Next hp

Answer 1

• Debt-equity ratio = Debt / Equity

1.5 = Debt / $2,700,000

Debt = $2,700,000 * 1.5

Debt = $4,050,000

• Current assets + Non current assets = Debt + Shareholder's equity

Current assets + $2,600,000 = $4,050,000 + $2,700,000

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

Current assets = $4,150,000

Required 1:

Current ratio = Current assets / Current liabilities

2.5 = $4,150,000 / Current liabilities

Current liabilities = $4,150,000 / 2.5

Current liabilities = $1,660,000

Required 2:

Long-term liabilities = Total debt - Current liabilities

Long-term debt = $4,050,000 - $1,660,000

Long-term debt = $2,390,000

Required 3:

Accounts receivable = Current assets - Cash - Prepaid expenses

Accounts receivable = $4,150,000 - $1,470,000 - $530,000

Accounts receivable = $2,150,000

Required 4:

Acid-test ratio = Quick assets / Current liabilities

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

Acid-test ratio = $1,470,000 + $2,150,000 / $1,660,000

Acid-test ratio = $3,620,000 / $1,660,000

Acid-test ratio = 2.2