Question

1. Effect of Transactions on Current Position Analysis

   Data pertaining to the current position of Lucroy Industries Inc. follow:

   Cash	$442,500
   Marketable securities	165,000
   Accounts and notes receivable (net)	330,000
   Inventories	700,000
   Prepaid expenses	46,000
   Accounts payable	210,000
   Notes payable (short-term)	245,000
   Accrued expenses	320,000

   Required:

   1. Compute (a) the working capital, (b) the current ratio, and (c) the quick ratio. Round ratios to one decimal place.

   a. Working capital	$
   b. Current ratio
   c. Quick ratio

   2. Compute the working capital, the current ratio, and the quick ratio after each of the following transactions and record the results in the appropriate columns. Consider each transaction separately and assume that only that transaction affects the data given. Round ratios to one decimal place.

   Transaction	Working Capital		Current Ratio		Quick Ratio
   a. Sold marketable securities at no gain or loss, $75,000.	$
   b. Paid accounts payable, $130,000.
   c. Purchased goods on account, $110,000.
   d. Paid notes payable, $110,000.
   e. Declared a cash dividend, $155,000.
   f. Declared a common stock dividend on common stock, $60,000.
   g. Borrowed cash from bank on a long-term note, $210,000.
   h. Received cash on account, $110,000.
   i. Issued additional shares of stock for cash, $555,000.
   j. Paid cash for prepaid expenses, $13,000.

Answer 1

1)

a) working capital = current assets - current liabilities

Here cash, marketable securities, accounts and notes receivable, inventories, prepaid expenses are current assets

And accounts payable, notes payable and accrued expenses are current liabilities.

Hence, working capital = $442500+ $165000+ $330000+ $700000+ $46000- $210000- $245000- $320000

= $908500

b) current ratio =  current assets current liabilities

= $1683500 $775000 = 2.2 c) quick ratio =   liquid current assets   total current liabilities

Liquid current assets include cash, marketable securities and accounts and notes receivable.

= $442500+ $165000+ $330000 $775000

= $937500 $775000

= 1.2

2) a-

Marketable securities left= $90000

Rest data is same. So working capital =

$442500+ $90000+$330000+ $700000+ $46000- $210000- $245000- $320000

= $1608500 - $775000 =$833500

Current ratio= $1608500 $ 775000

= 2.1

Quick ratio = $862500 $775000

= 1.1

b) Accounts payable =$210000 - $130000 =$80000

Working capital = $442500+ $165000+$330000+ $700000+ $46000- $80000- $245000- $320000

= $1683500 - $645000

= $1038500

Current ratio = $1683500   $645000   

= 2.6

Quick ratio = $442500 + $165000 + $330000 $645000

​​ = $937500 $645000   

= 1.5

c) purchasing done with cash of $110000

Left cash = $442500 - $110000 = $332500

Working capital = $332500+ $165000+ $330000+ $700000+ $46000- $210000- $245000- $320000

= $1573500 - $775000

= $798500

Current ratio = $1573500 $775000

= 2.0

Quick ratio = $332500+ $165000+ $330000 $775000

= $827500 $775000

= 1.1

d) notes payable = $245000 - $110000

= $135000

Working capital = $442500+ $165000+ $330000+ $700000+ $46000- $210000- $135000 - $320000

= $1683500 - $665000

= $1018500

Current ratio = $1683500 $665000 = 2.5

Quick ratio = $442500+ $165000+ $330000 $665000

= $937500 $665000

= 1.4

e) dividends payable = $155000. It is a liability

Working capital = $1683500 - $775000- $155000

= $753500

Current ratio =   $1683500 $930000  

= 1.8

Quick ratio = $937500 $930000

= 1.0