Question

In: Accounting

Assuming a current ratio of 1.4 and an acid-test ratio of 0.78, how will the cash...

Assuming a current ratio of 1.4 and an acid-test ratio of 0.78, how will the cash payment of Prepaided Insurance affect each ratio?

  1. Increase the current ratio and increase the acid-test ratio
  2. No change to the current ratio and decrease the acid-test ratio
  3. Decrease the current ratio and decrease the acid-test ratio
  4. Decrease the current ratio and increase the acid-test ratio
  5. None of above

Solutions

Expert Solution

Solution: No change to the current ratio and decrease the acid-test ratio

Working:

Journal entry will be:

Dr. Prepaid Rent $10,000

Cr. Cash $10,000

Prepaid rent and cash are current assets thus there will be no impact on current ratio. Quick assets excludes prepaid rent thus there will be a decrease in quick assets which will cause a decrease in the acid-test ratio

ekkarill92 answered 2 years ago
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