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Current Liabilities and Ratios Several accounts that appeared on Spring's 2017 balance sheet are as follows:...

Current Liabilities and Ratios

Several accounts that appeared on Spring's 2017 balance sheet are as follows:

Accounts Payable $74,000 Equipment $950,000
Marketable Securities 40,000 Taxes Payable 15,000
Accounts Receivable 35,600 Retained Earnings 250,000
Notes Payable, 12%, due in 60 days 20,000 Inventory 165,000
Capital Stock 1,150,000 Allowance for Doubtful Accounts 20,000
Salaries Payable 10,000 Land 600,000
Cash 65,000

Required:

1. Prepare the Current Liabilities section of Spring's 2017 balance sheet.

Spring
Partial Balance Sheet
As Of December 31, 2017
Current liabilities:
$
Total current liabilities $

2. Compute Spring's working capital.

    $_____________

3. Compute Spring's current ratio. Round your answer to one decimal place.

______________ : 1

    What does this ratio indicate about Spring’s condition?

    It seems that Spring has (Sufficient/Insufficient) ___________ current assets to meet its short-term obligations.

Solutions

Expert Solution

1) Current Liabilities are short-term obligations which are expected to be paid or settled with one year.

Partial Balance Sheet As of December 31,2017

Current Liabilities : $
Accounts Payable $74,000
Notes Payable $20,000
Salaries Payable $10,000
Tax Payable $15,000
Total Current Liabilities $119,000

2) Working Capital represents the difference between company's current assets and its current liabilities.

Working Capital = Current Assets (Note a) - Current Liabilities
= $285,600 - $119,000
   = $166,600

Note a : Current Assets are cash and other assets that can be converted into cash within a year

Marketable Securities $40,000
Net Accounts Receivable ($35,600 - $20,000) $15,600
Cash $65,000
Inventory $165,000
Total Current Assets $285,600

Allowance for Doubtful Accounts is a contra-asset account which is deducted from Accounts Receivable.

3) Current Ratio is a liquidity ratio which measures the company's abilitiy to meet its short-term obligations.

Current Ratio = Current Assets / Current Liabilities
= $285,600 / $119,000
= 2.4 : 1

Spring has 2.4 times more current assets current Liabilities.
Ans : It seems that spring has Sufficient current assets to meet its short-term obligations.

jeff jeffy answered 1 year ago
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