Question

7.5 – The XYX Corporation has current liabilities of $130,000 with a current ratio of 2.5:1. Indicate whether the individual transactions specified next increase or decrease the current ratio or the amount of working capital and by how much and why in each case. Treat each item separately.

1. Purchase is made of $10,000 worth of merchandise on account

2. The company collects $5000 in accounts receivable.

3. Repayment is planned of note payable which is due in current period, with $15,000 cash from bank account.

4. The acquisition of a machine priced at $40,000 is paid for with $10,000 cash, and the lump-sum balance is due in 18 months.

5. The company conducts a sale of machinery for $10,000. Accumulated depreciation is $50,000, and its original cost is $80,000.

6. The company pays dividends of $10,000 in cash and $10,000 in stock.

7. Wages are paid to extent of $15,000. Of this amount, $3000 had been shown on the balance sheet as accrued (due).

8. The company borrows $30,000 for one year. Proceeds are used to increase the bank account by $10,000 to pay off accounts due to the supplier ($15,000) and to acquire the right patents ($5,000).

9. The company writes down inventories by $7,000 and organization expenses by $5,000.

10. The company sells $25,000 worth (cost) of merchandise from stock to customers who pay in 30 days. Company has a gross margin of 40 percent.

Answer 1

Current assets = 130,000 * 2.5 = 325,000

S No	Effect	Current ratio	Working capital	Workings
1	Decrease	2.39	unchanged	[335000/140000]
2	No effect	2.5	unchanged	[(325000+5000-5000)/130000)
3	Decrease	2.38	unchanged	[310000/130000]
4	Decrease	2.42	185000	[315000/130000]
5	Increase	2.58	205000	[335000/130000]
6	Decrease	2.42	185000	[315000/130000]
7	Decrease	2.35	190000
8	Increase	2.91	188000
9	Decrease	2.41	183000	[(325000-7000-5000)/130000]
10	Increase		211667