Question

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, $1,300,000; prepaid expenses, $360,000; long-term assets, $2,400,000; and shareholders’ equity, $2,500,000. The current ratio at the end of the year was 2.0 and the debt to equity ratio was 1.4.

 

Required:

Determine the following 2021 amounts and ratios:

1. Current liabilities

2. Long-term liabilities

3. Accounts receivable

4. The acid-test ratio

Answer 1

1.

Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1.4

Total liabilities ÷ $2,500,000 = 1.4

Shareholders’ equity × 1.4 = Total liabilities

$2,500,000 × 1.4 = $3,500,000 = Total liabilities

 

Total liabilities + Equity = Total assets

 $3,500,000 + $2,500,000 = $6,000,000 = Total assets

 

Total assets – Long-term assets = Current assets

$6,000,000 – $2,400,000 = $3,600,000 = Current assets

 

Current ratio = Current assets ÷ Current liabilities

2.0 = $3,600,000 ÷ Current liabilities

Current liabilities = $3,600,000 ÷ 2 = $1,800,000

 

2.

Total assets = Total liabilities + Shareholders’ equity

Total assets = Current liabilities + Long-term liabilities + Shareholders’ equity

$6,000,000 = $1,800,000 + Long-term liabilities + $2,500,000

Long-term liabilities = $1,700,000

 

3.

Current assets = Cash + Accounts receivable + Prepaid expenses

$3,600,000 = $1,300,000 + Accounts receivable + $360,000

Accounts receivable = $1,940,000

 

4.

Acid-test ratio = Quick assets ÷ Current liabilities

Quick assets = Cash + Accounts receivable

Quick assets = $1,300,000 + $1,940,000 = $3,240,000

Acid-test ratio = $3,240,000 ÷ $1,800,000 = 1.8

Current liabilities = $1,800,000

Long-term liabilities = $1,700,000

Accounts receivable = $1,940,000

 Acid-test ratio = 1.8