Data pertaining to the current position of Forte Company follow: Cash $400,000 M
ID: 2591730 • Letter: D
Question
Data pertaining to the current position of Forte Company follow:
Cash
$400,000
Marketable securities
162,500
Accounts and notes receivable (net)
325,000
Inventories
750,000
Prepaid expenses
46,000
Accounts payable
230,000
Notes payable (short-term)
260,000
Accrued expenses
295,000
1.
Compute (A) the working capital, (B) the current ratio, and (C) the quick ratio. Round ratios to one decimal place.
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 of the table provided. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place.
A.
Sold marketable securities at no gain or loss, 70,000.
B.
Paid accounts payable, 140,000.
C.
Purchased goods on account, 115,000.
D.
Paid notes payable, 115,000.
E.
Declared a cash dividend, 150,000.
F.
Declared a common stock dividend on common stock, 50,000.
G.
Borrowed cash from bank on a long-term note, 210,000.
H.
Received cash on account, 115,000.
I.
Issued additional shares of stock for cash, 630,000.
J.
Paid cash for prepaid expenses, 8,000.
1.
Compute the following. Round ratios to one decimal place
A.
Working capital:
B.
Current ratio:
C.
Quick ratio:
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 of the table provided. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place.
Working
Current
Quick
Transaction
Capital
Ratio
Ratio
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
Cash
$400,000
Marketable securities
162,500
Accounts and notes receivable (net)
325,000
Inventories
750,000
Prepaid expenses
46,000
Accounts payable
230,000
Notes payable (short-term)
260,000
Accrued expenses
295,000
1.
Compute (A) the working capital, (B) the current ratio, and (C) the quick ratio. Round ratios to one decimal place.
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 of the table provided. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place.
A.
Sold marketable securities at no gain or loss, 70,000.
B.
Paid accounts payable, 140,000.
C.
Purchased goods on account, 115,000.
D.
Paid notes payable, 115,000.
E.
Declared a cash dividend, 150,000.
F.
Declared a common stock dividend on common stock, 50,000.
G.
Borrowed cash from bank on a long-term note, 210,000.
H.
Received cash on account, 115,000.
I.
Issued additional shares of stock for cash, 630,000.
J.
Paid cash for prepaid expenses, 8,000.
1.
Compute the following. Round ratios to one decimal place
A.
Working capital:
B.
Current ratio:
C.
Quick ratio:
Explanation / Answer
Solution 1
(A)Working capital = Total Current Assets – Total Current Liabilities
= $ 1,683,500 - $ 785,000
= $ 898,500 (Answer)
Working Notes:
Total Current Assets
Total Current Liabilities
= Cash + Marketable securities + Accounts and notes receivable (net) + Inventories+ Prepaid expenses
= $ 400,000 + 162,500 + 325,000 + 750,000+ 46,000
= $ 1,683,500
= Accounts payable + Notes payable (short-term) + Accrued expenses
= $ 230,000 + 260,000 + 295,000
= $ 785,000
(B)Current Ratio = Total Current Assets / Total Current Liabilities
= $ 1,683,500 / $ 785,000
= 2.1:1 (Answer)
Working Notes:
Total Current Assets
Total Current Liabilities
= Cash + Marketable securities + Accounts and notes receivable (net) + Inventories+ Prepaid expenses
= $ 400,000 + 162,500 + 325,000 + 750,000+ 46,000
= $ 1,683,500
= Accounts payable + Notes payable (short-term) + Accrued expenses
= $ 230,000 + 260,000 + 295,000
= $ 785,000
(C)Quick Ratio = Quick Assets* / Total Current Liabilities
= $ 887,500 / $ 785,000
= 1.1: 1 (Answer)
Working Notes:
*Quick Assets= Total Current Assets – Prepaid expenses –Inventories
Quick Assets
Total Current Liabilities
= Total Current Assets – Prepaid expenses -Inventories
= $ 1,683,500 – 46,000 -750,000
= $ 887,500
= Accounts payable + Notes payable (short-term) + Accrued expenses
= $ 230,000 + 260,000 + 295,000
= $ 785,000
Solution 2
Amounts referred from solution 1 (And recording changes in that, after each transaction given)
Total Current Assets= $ 1,683,500
Total Current Liabilities = $ 785,000
Quick Assets=$ 887,500
Working capital = $ 898,500
Current Ratio = 2.1:1
Quick Ratio=1.1: 1
Formulas’ Used:
Working capital = Total Current Assets – Total Current Liabilities
Current Ratio = Total Current Assets / Total Current Liabilities
Quick Ratio = Quick Assets* / Total Current Liabilities
*Quick Assets= Total Current Assets – Prepaid expenses –Inventories
Impact on Current Assets and Liabilities
Working
Current
Quick
Transaction
(Additional Information)
Capital
Ratio
Ratio
A.
Marketable securities (Current Asset): Decrease by $ 70,000.
Cash (Current Asset): Increase by $ 70,000.
= $ 1,683,500- $ 785,000
= $ 898,500 (Answer)
Working Notes:
Total Current Assets
= $ 1,683,500 - $ 70,000 + $ 70,000
= $ 1,683,500
Total Current Liabilities
= $ 785,000
= $ 1,683,500 / $ 785,000
= 2.1:1 (Answer)
=$ 887,500 / $ 785,000
= 1.1: 1 (Answer)
Working Notes:
Quick Assets
= $ 1,683,500 -46,000 -750,000
=$ 887,500
Total Current Liabilities
= $ 785,000
B.
Accounts Payable (Current Liability): Decrease by $ 140,000.
Cash (Current Asset):
Decrease by $ 140,000.
= $ 1,543,500 - $ 645,000
=$ 898,500 (Answer)
Working Notes:
Total Current Assets
= $ 1,683,500 - $ 140,000
= $ 1,543,500
Total Current Liabilities
= $ 785,000 - $ 140,000
=$ 645,000
= $ 1,543,500 / $ 645,000
= 2.4 :1
(Answer)
= $ 747,500 / $ 645,000
= 1.2:1
Working Notes:
Quick Assets
= $ 1,543,500-46,000 -750,000
= $ 747,500
Total Current Liabilities
=$ 645,000
C.
Inventories (Current Asset): Increase by $ 115,000
Accounts Payable (Current Liability): Increase by $ 115,000
=$ 1,798,500 -$ 900,000
= $ 898,500 (Answer)
Working Notes:
Total Current Assets
= $ 1,683,500 + $ 115,000
= $ 1,798,500
Total Current Liabilities
= $ 785,000 + $ 115,000
=$ 900,000
=$ 1,798,500 / $ 900,000
= 2.0:1 (Answer)
= $ 887,500 / $ 900,000
= 0.9:1 (Answer)
(Or you can write 1:1 as actual answer is 0.99)
Working Notes:
Quick Assets
=$ 1,798,500 -46,000 -865,000*
= $ 887,500
Total Current Liabilities
=$ 900,000
*New Inventories
= $ 750,000 + 115,000
=$ 865,000
D.
Notes Payable (Current Liability): Decrease by $ 115,000.
Cash (Current Asset):
Decrease by $ 115,000.
= $ 1,568,500-$ 670,000
= $ 898,500 (Answer)
Working Notes:
Total Current Assets
= $ 1,683,500 - $ 115,000
= $ 1,568,500
Total Current Liabilities
= $ 785,000 - $ 115,000
=$ 670,000
= $ 1,568,500 / $ 670,000
= 2.3 :1 (Answer)
=$ 772,500 / $ 670,000
= 1.2 : 1
(Answer)
Working Notes:
Quick Assets
= $ 1,568,500-46,000 -750,000
= $ 772,500
Total Current Liabilities
=$ 670,000
E.
Dividend payable (Current Liability): Increase by $ 150,000.
Current Asset: No effect as dividend is not yet paid
= $ 1,683,500- $ 935,000
= $ 748,500
(Answer)
Working Notes:
Total Current Assets
= $ 1,683,500
Total Current Liabilities
= $ 785,000 + $ 150,000
=$ 935,000
=$ 1,683,500 / $ 935,000
=1.8:1 (Answer)
=$ 887,500 / $ 935,000
= 0.9: 1 (Answer)
(Or you can write 1:1 as actual answer is 0.94)
Working Notes:
Quick Assets
= $ 1,683,500 -46,000 -750,000
=$ 887,500
Total Current Liabilities
=$ 935,000
F.
Dividend payable (Current Liability): Increase by $ 50,000.
Current Asset: No effect as dividend is to be given in kind (That is stock)
= $ 1,683,500- $ 835,000
= $ 848,500
(Answer)
Working Notes:
Total Current Assets
= $ 1,683,500
Total Current Liabilities
= $ 785,000 + $ 50,000
=$ 835,000
=$ 1,683,500 / $ 835,000
=2.0:1 (Answer)
=$ 887,500 / $ 835,000
= 1.1: 1 (Answer)
Working Notes:
Quick Assets
= $ 1,683,500 -46,000 -750,000
=$ 887,500
Total Current Liabilities
=$ 835,000
G.
Current Liability: No effect as long term loan borrowed
Cash (Current Asset): Increase by $ 210,000
= $ 1,893,500-$ 785,000
= $ 1,108,500 (Answer)
Working Notes:
Total Current Assets
= $ 1,683,500 + $ 210,000
= $ 1,893,500
Total Current Liabilities
= $ 785,000
=$ 1,893,500/ $ 785,000
=2.4:1
(Answer)
=$ 1,097,500 / $ 785,000
= 1.4: 1 (Answer)
Working Notes:
Quick Assets
= $ 1,893,500-46,000 -750,000
=$ 1,097,500
Total Current Liabilities
=$ 785,000
H.
Accounts Receivable (Current Asset): Decrease by $ 115,000.
Cash (Current Asset):
Increase by $ 115,000.
= $ 1,683,500-$ 785,000
= $ 898,500 (Answer)
Working Notes:
Total Current Assets
= $ 1,683,500 - $ 115,000 + $ 115,000
= $ 1,683,500
Total Current Liabilities
=$ 785,000
= $ 1,683,500 / $ 785,000
= 2.1:1 (Answer)
=$ 887,500 / $ 785,000
= 1.1: 1 (Answer)
Working Notes:
Quick Assets
= $ 1,683,500 -46,000 -750,000
=$ 887,500
Total Current Liabilities
= $ 785,000
I.
Current Liability : No effect as stock is part of shareholder's equity.
Cash (Current Asset): Increase ny $ 630,000
=$ 2,313,500-$ 785,000
= $ 1,528,500 (Answer)
Working Notes:
Total Current Assets
= $ 1,683,500 + $ 630,000
= $ 2,313,500
Total Current Liabilities
=$ 785,000
=$ 2,313,500 / $ 785,000
= 2.9:1 (Answer)
=$ 1,517,500 / $ 785,000
= 1.9: 1 (Answer)
Working Notes:
Quick Assets
= $ 2,313,500 -46,000 -750,000
=$1,517,500
Total Current Liabilities
= $ 785,000
J.
Prepaid expenses (Current Asset) :Decrease by $ 8,000
Cash (Current Asset): Decrease by $ 8,000
Total Decrease in Current Assets $ 16,000
Current Liability :No effect
=$ 1,667,500-$ 785,000
= $ 882,500 (Answer)
Working Notes:
Total Current Assets
= $ 1,683,500 - $ 8,000- $ 8,000
= $ 1,667,500
Total Current Liabilities
=$ 785,000
= $ 1,667,500 / $ 785,000
= 2.1 :1 (Answer)
=$ 879,500 / $ 785,000
= 1.1: 1 (Answer)
Working Notes:
Quick Assets
= $ 1,667,500 -38,000* -750,000
=$879,500
Total Current Liabilities
= $ 785,000
*New prepaid expenses= $ 46,000 -$ 8,000
= $ 38,000
Total Current Assets
Total Current Liabilities
= Cash + Marketable securities + Accounts and notes receivable (net) + Inventories+ Prepaid expenses
= $ 400,000 + 162,500 + 325,000 + 750,000+ 46,000
= $ 1,683,500
= Accounts payable + Notes payable (short-term) + Accrued expenses
= $ 230,000 + 260,000 + 295,000
= $ 785,000
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