Question

On June 30, 2018, Adams Company’s total current assets were $504,500 and its total current liabilities were $278,000. On July 1, 2018, Adams issued a short-term note to a bank for $40,200 cash. Required Compute Adams’s working capital before and after issuing the note. Compute Adams’s current ratio before and after issuing the note. (Round your answers to 2 decimal places.)

Answer 1

Answer:

Old Current Ratio = 1.815

New Current Ratio = 1.712

Explanation:

Working Capital = Current Assets - Current Liabilities

Given : Current Assets = 504500 , Current Liabilities = 278000

Current Ratio = Current Assets / Current Liabilities

= 504500 / 278000 = 1.815

• Issue of short term note (current liability) to bank for 40200 cash (current asset) leads to following change in working capital :-

Current Assets = 504500 + 40200 = 544700

Current Liabilities = 278000 + 40200 = 318200

Current Ratio = Current Assets / Current Liabilities

= 544700 / 318200 = 1.712