Compute the following as of December 31, 2016: For 2017, indicate the effect of

Question

Compute the following as of December 31, 2016:

For 2017, indicate the effect of each of these transactions on working capital, current ratio, and acid-test ratio of the company. Increase, Decrease, or No Effect.
Consider each transaction independently.

Working Capital

Current Ratio

Acid-Test Ratio

a.

Purchased new plant assets for cash, $20,000.

b.

Exchanged common stock for purchasing land. Estimated value of transaction, $80,000.

c.

Payment of $40,000 on short-term notes payable.

d.

Sold short-term marketable securities, that had a cost of $20,000, for $25,000 cash.

e.

Sold common stock for $70,000 in cash.

f.

Wrote off an account receivable in the amount of $2,000.

g.

Declared a cash dividend in the amount of $5,000, to be paid later.

Working capital    Current ratio Acid-test ratio (Quick ratio) $100,000 Cash Short-term Marketable $50,000 Securities $250,000 Accounts Receivables Less: Allowance for Doubtful (20,000) $230,000 $300,000 $8,000 $200,000 $50,000 $10,000 $30,000 Accounts Inventory (LIFO-based) Prepaid Expense Accounts Payable Short-term Notes Payable Taxes Payable Accrued Liabilities

Explanation / Answer

Working capital = current asset – current liability

                           = (100000 + 50000 + 230000 + 300000 + 8000) - (200000 + 50000 + 10000 + 30000)

                            = 688000 - 290000

                           = 398000

Currenr ratio = Current asset/current liability

                         = 688000/290000

                        = 2.37

Liquid ratio = ( current asset – inventory – prepaid Expense)/current liability

                      = (688000 – 300000 – 8000)/290000

                      = 380000/290000

                     = 1.31

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