Question

Exercise 3-19 (Algo) Calculating ratios; solve for unknowns [LO3-8]

The current asset section of Guardian Consultant’s balance sheet consists of cash, accounts receivable, and prepaid expenses. The 2021 balance sheet reported the following: cash, $1,330,000; prepaid expenses, $390,000; long-term assets, $2,700,000; and shareholders’ equity, $2,800,000. The current ratio at the end of the year was 2.5 and the debt to equity ratio was 1.3.

Required:
Determine the following 2021 amounts and ratios: (Round your "The acid-test ratio" answer to 1 decimal place.)

	1. Current liabilities 2. Long-term liabilities 3. Accounts receivable 4. The acid-test ratio

Answer 1

Answer:

1	Current liabilities	$1,496,000
2	Long-term liabilities	$2,144,000
3	Accounts receivable	$2,020,000
4	The acid-test ratio	2.24

Calculations:

^{Debt to Equity ratio = 1.3}

^{Total Debt ÷ Stockholders' equity = 1.3}

^{Total debt ÷ $2,800,000 x 1.3}

^{Total Debt = $3,640,000}

^{Total assets = Total debt + Stockholders' equity = $3,640,000 + $2,800,000 = $6,440,000}

Current assets = Total assets - Long-term assets = $6,440,000 - $2,700,000 = $3,740,000

1. Current liabilities:

Current ratio = 2.5

Current assets ÷ Current liabilities = 2.5

Current liabilities = Current assets ÷ 2.5

Current liabilities = $3,740,000 ÷ 2.5

Current liabilities = $1,496,000

2.Long-term liabilities:

Long-term liabilities = Total liabilities - Current liabilities

Long-term liabilities = $3,640,000 - $1,496,000

Long-term liabilities = $2,144,000

3. Accounts receivable:

Accounts receivable = Total current assets - Cash - Prepaid expenses

Accounts receivable = $3,740,000 - $1,330,000 - $390,000

Accounts receivable = $2,020,000

4.Acid-test ratio:

Acid test ratio = (Cash + Accounts receivable) ÷ Current liabilities

Acid test ratio = ($1,330,000+$2,020,000) ÷ $1,496,000

Acid test ratio = $3,350,000 ÷ $1,496,000

Acid test ratio = 2.24