Question

On June 30, 2018, Franza Company's total current assets were $900,000 and its total current liabilities were $360,000. On July 1 2018, Franza issued a short-term note to a bank for $72,000 cash. 275 Required points a. Compute Franza's working capital before and after issuing the note. b. Compute Franza's current ratio before and after issuing the note. (Round your answers to 2 decimal places.) Before the transaction After the transaction a. Working Captal Current Ratio Beforences

Answer 1

Answer a)

Calculation of working capital and current ratio before the transaction

As on June 30,2018
Before the Transaction
Particulars	Amount
Current Assets	$ 900,000
Current Liabilities	$ 360,000

Working Capital = Current Assets – Current Liabilities

                               = $ 900,000- $ 360,000

                                = $ 540,000

Therefore the working capital of the company prior to the transaction of issue of short-term note is $ 540,000.

Current ratio = Current Assets/ Current Liabilities

                               = $ 900,000/ $ 360,000

                                = 2.50 times

Therefore the Current ratio of the company prior to the transaction of issue of short-term note is 2.50 times.

Answer b)

Calculation of working capital and current ratio after the transaction

As on June 30,2018
Before the Transaction
Particulars	Before the transaction	Increase	After the transaction
Current Assets	$ 900,000	$ 72,000	$ 972,000
Current Liabilities	$ 360,000	$ 72,000	$ 432,000

Note: The issue of Short-term note for cash increase both the current assets (Cash) and current liabilities (Short term note) by $ 72,000 each.

Working Capital = Current Assets – Current Liabilities

                               = $ 972,000- $ 432,000

                                = $ 540,000

Therefore the working capital of the company after the transaction of issue of short-term note is $ 540,000.

Current ratio = Current Assets/ Current Liabilities

                               = $ 972,000/ $ 432,000

                                = 2.25 times

Therefore the Current ratio of the company after the transaction of issue of short-term note is 2.25 times.