Keener Incorporated had the following transactions occur involving current asset

Question

Keener Incorporated had the following transactions occur involving current assets and current liabilities during February 2017.

Additional information:

Compute the acid-test ratio as of the beginning of the month and after each transaction

Round answers to 1 decimal place, e.g. 1.6.)

Current ratio

Acid-test ratio

Feb. 3 Accounts receivable of $14,000 are collected. 7 Equipment is purchased for $27,800 cash. 11 Paid $2,300 for a 3-year insurance policy. 14 Accounts payable of $12,500 are paid. 18 Cash dividends of $5,700 are declared.

Explanation / Answer

Compute the current ratio as of the beginning of the month and after each transaction.

As of February 1, 2017, current assets were $130,200, and current liabilities were $49,300.

Current ratio = Current Assets/Current Liabilities = 130,200/49,300 = 2.65

Acid -test ratio = (Current Asset – Inventory) ÷Current Liability = (130,200-15,900)/49,300

Current Ratio Acid -Test Ratio Feb 1 2.65 2.32 Feb 3 2.65 2.32 Feb 7 =130,200-27,800/49,300= 2.08 1.75 Feb11 2.08( no impact of prepaid expense) as one side cash reduces and a new current asset gets created) 1.75 Feb 14 = (130,200-27,800-12,500)/(49,300-12,500) = 89,900/36,800 = 2.44 =74,000/36800=2.01 Feb 18 = 89,900/36,800+5,700= 2.12( dividend are declared only not yet paid so no impact om cash and equity part). But current liabilty will increase as dividends are payable =74,000/42,500= 1.74

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