Question

# Effect of Transactions on Current Position Analysis Data pertaining to the current position of Newlan Company...

Effect of Transactions on Current Position Analysis

Data pertaining to the current position of Newlan Company are as follows:

 Cash \$328,700 Temporary investments 169,300 Accounts and notes receivable (net) 498,000 Inventories 425,800 Prepaid expenses 22,400 Accounts payable 174,300 Notes payable (short-term) 249,000 Accrued expenses 74,700

Instructions:

1. Compute (a) the working capital, (b) the current ratio, and (c) the quick ratio. Round the current ratio and the quick ratio to one decimal place. (I answered this question already)

 Working capital \$946,200 Current ratio 2.9 Quick ratio 2

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 above. Format working capital as whole dollars. Round the current ratio and the quick ratio to one decimal place.

 Transaction Working Capital Current Ratio Quick Ratio
 a. Sold temporary investments for cash at no gain or loss, \$56,000. \$________ _______ _______ b. Paid accounts payable, \$100,000. \$________ _______ _______ c. Purchased goods on account, \$62,000. \$________ _______ _______ d. Paid notes payable, \$124,500. \$________ _______ _______ e. Declared a cash dividend, \$100,000. \$________ _______ _______ f. Declared a stock dividend on common stock, \$30,000. \$________ _______ _______ g. Borrowed cash from bank on a long-term note, \$249,000. \$________ _______ _______ h. Received cash on account, \$84,500. \$________ _______ _______ i. Issued additional shares of stock for cash, \$498,000. \$________ _______ _______ j. Paid cash for prepaid expenses, \$49,800. \$________ _______

 1 Current Assests \$ Current Liabilities \$ Cash 328700 Accounts payable 174300 Temporary investments 169300 Notes payable 249000 Accounts & notes receivable 498000 Accrued expenses 74700 Inventories 425800 Prepaid expenses 22400 TOTAL 1444200 498000 Working capital = Current assets - current liabilities

= 1444200-498000

=946200

Current ratio = current assets /current liabilities

= 1444200/498000

2.9

Quick ratio = Current assets-inventories/current liabilities

=1444200-425800/498000

=2.04

2.

 Transaction Working capital (\$) Current ratio Quick ratio a 946200 2.9 2.04 b 946200 3.92 2.60 c 946200 2.9 1.92 d 946200 4.8 3.08 e 846200 2.69 1.84 f NO effect NO effect NO effect G 1195200 3.4 2.54 h 1030700 3.06 2.21 i 1444200 3.9 3.04 j 946200 2.9 2.04

Explanation to all the transactions

1. Investment account will be debited by \$56000 and cash account will be credited by \$56000 as investment is sold, net effect on the current assets is nil as amount deducted on one current asset is credited to another current asset by the same amount.

Current asset= 1444200, current liabilities=498000

1. Here is reduction in cash account by \$100000 and account payable is also reduced by \$100000.

Reduce \$100000 from both current assets and current liabilities.

1. Cash is reduced by \$62000 and inventories is increased by the same amount.
2. Cash account is reduced by \$124500 and decrease the notes payable by the same amount.
3. Reduce the cash account by \$100000, current assets will go down by \$100000.
4. No effect on any of the accounts. As dividends are issued in form of shares not cash.
5. Cash account will increase by \$249000, long term liability will increase by the same amount but long term liability effect will not be considered for working capital, current and quick ratio. So just increase the cash account by \$249000
6. Cash account will increase by \$84500 rest accounts will remain same
7. Cash account will be increased by \$498000 as cash is collected by issue of shares but it will not affect any other accounts because issue of shares is long term finance
8. Increase prepaid expenses account by \$49800 and decrease cash account by \$49800.

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