Question

On June 30, 2018, Vernon Company's total current assets were $496,000 and its total current liabilities were $279,000. On July 1, 2018, Vernon issued a long-term note to a bank for $38,400 cash. Required a. Compute Vernon's working capital before and after issuing the note. b. Compute Vernon's current ratio before and after issuing the note. (Round your answers to 1 decimal place.) Before the After the transaction transaction a. Working Capital b. Current Ratio

Answer 1

Ans.		Before the transaction	After the transaction
	Working capital	$217,000	$255,400
	Current ratio	1.78 : 1	1.92 : 1
	*Calculations of working capital and current ratio before the transaction:
	Working capital =     Total current assets - Total current liabilities
		$496,000 - $279,000
		$217,000
	Current ratio   =   Total current assets / Total current liabilities
		$496,000 / $279,000
		1.78 : 1
	*Calculations of working capital and current ratio after the transaction:
	Issuance of long term note is a long term liability so the current liabilities will
	not change by this transaction.
	Long term not is issued for cash and cash is a current asset, so the current assets
	will increase by $38,400 as a result of this transaction.
	Current assets ($496,000 + $38,400) = $534,400
	Current liabilities = $279,000
	Working capital =     Total current assets - Total current liabilities
		$534,400 - $279,000
		$255,400
	Current ratio   =   Total current assets / Total current liabilities
		$534,400 / $279,000
		1.92 : 1