Question

Case 2:

Euro Kitchens – a kitchen cabinet maker has presented the following account balances to you as on 31 December 20X1:

Euro Kitchens, capital $123 450

Building (net) 55 500

Investment in government bonds 45 000

Mortgage payable (due 1/7/20X8) 33 750

Notes payable (due 31/12/20X5) 22 500

Interest on Notes payable 1 200

Office equipment (net) 35 400

Depreciation expense – Office equipment 3 500

Accounts receivable 28 950

Bad debts 7 200

Accounts payable 22 050

Inventory 19 800

Cash 9 150

Land 6 000

GST collected (on behalf of tax office) 4 500

Marketable securities 4 500

Office supplies 4 050

GST paid 3 000

PAYG tax payable 3 000

Salaries payable 1 650

Sales Revenue 82 000

Unearned revenue 1 500

Prepaid insurance 1 350

Interest payable (current year) 300

Required:

1. Prepare a Balance Sheet showing Current Assets, Non-current assets, Current Liabilities, Non-current liabilities and Owner’s equity for Euro Kitchens as on 31 December20X1.

2. Assume that you are working in the ABC bank where Euro Kitchens is applying for

$18 000 short-term loan. The bank manager is asking you to prepare a report on the liquidity and solvency of the business by calculating the Current Ratio, Quick Ratio (or Acid-test ratio) and Debt to Assets ratio of the business.

Answer 1

   Balance sheet as on 31st december 2001

Capital 123450	Non current assets
	Land 6000
Non Current Liabilities	Building 55500
Mortage Loan    33750	office equipment 35400
Notes Payable 22500
	Non current investment 45000
Current Liabilties
Accounts payable    22050	Current Assets
Satutory Liability    4500 GST payable    4500 +Payg tax payable 3000 -GST Paid    (3000)	Accounts Receivable    28950
Salaries payable    1650	inventory 19800
Interest Payable 300	cash 9150
Unearned revenue 1500	marketable securities    4500
	Office supplies 4050
	Prepaid Expenses    1350
Total    209700	Total 209700

1. Current Ratio= Current assets/ current liabilities

=(28950+1980+9150+4500+4050+1350) / (22050+4500+3000+1650+300+1500)

=67800/30000= 2.26 : 1

2. Quick ratio= (CASH+MARKETABLE SECURITIES+ ACCOUNTS RECEIVABLE)/ (CURRENT LIABILITIES)

   =(9150+4500+28950)/30000 = 1.42 : 1

3. Debt to asset Ratio = Total Debt / Total Assets

   = Total current & noncurrent liab. / Total Assets

=86250/209700 = 0.411 : 1