Question

12

Current Position Analysis The bond indenture for the 10-year, 8% debenture bonds dated January 2, 2048, required working capital of $200,000, a current ratio of 2.0, and a quick ratio of 1.0 at the end of each calendar year until the bonds mature. At December 31, 2089, the three measures were computed as follows: 1. Current assets: Cash $222,000 Temporary investments 277,500 Accounts receivable (net) 444,000 Inventories 351,500 Prepaid expenses 92,500 Intangible assets 55,500 Property, plant, and equipment 999,000 Total current assets (net) $2,442,000 Current liabilities: Accounts and short-term notes payable $224,000 Accrued liabilities 256,000 Total current liabilities (480,000) Working capital $1,962,000 $2,442,000+ 2. Current ratio $480,000 $1,221,000 3. Quick ratio $224,000 a. There are errors in the calculation of the three measures of current position analysis. Determine the correct amounts. Round ratios to two decimal places. Working capital

Answer 1

Answer a.

Current assets = cash+temporary investment+Accounts Receivable+inventory+prepaid expenses

= 222000+277500+444000+351500+92500 = $1,387,500

Current liabilities = $480,000

Working capital = current assets - Current liabilities = 1,387,500 - 480,000 = $907,500

Current ratio = Current assets / current liabilities = 1,387,500 / 480,000 = 2.89

Quick ratio = (Total current assets-Prepaid expenses-Inventory)/Total Current Liabilities

= (1387500 -351500 -92500 ) / 480000 = 1.97

Answer b.

The company is in compliance with the requirements of bond indenture.