Question

Plum Corporation began the month of May with $1,200,000 of current assets, a current ratio of 2.20:1, and an acid-test ratio of 1.20:1. During the month, it completed the following transactions (the company uses a perpetual inventory system). May 2 Purchased $75,000 of merchandise inventory on credit. 8 Sold merchandise inventory that cost $60,000 for $140,000 cash. 10 Collected $31,000 cash on an account receivable. 15 Paid $28,000 cash to settle an account payable. 17 Wrote off a $5,000 bad debt against the Allowance for Doubtful Accounts account. 22 Declared a $1 per share cash dividend on its 59,000 shares of outstanding common stock. 26 Paid the dividend declared on May 22. 27 Borrowed $100,000 cash by giving the bank a 30-day, 10% note. 28 Borrowed $125,000 cash by signing a long-term secured note. 29 Used the $225,000 cash proceeds from the notes to buy new machinery. Required: Complete the table below showing Plum's (1) current ratio, (2) acid-test ratio, and (3) working capital after each transaction. (Do not round intermediate calculations. Round your ratios to 2 decimal places and the working capitals to nearest dollar amount. Subtracted amount should be indicated with a minus sign.)

Answer 1

• All working forms part of the answer
• Calculation of Quick Assets and Current Liabilities:

Current Assets	$ 1,200,000
Current Ratio	2.20:1
Current Liabilities	[1200000 x 1/2.20] = $545,455
Acid Test Ratio	1.20:1
Quick Asset	[$ 545,455 x 1.20/1] = $654,546

• Calculation of all ratios asked, after each transaction:

	Current Assets	Quick Assets	Current Liabilities	Current Ratio	Acid Test Ratio	Working Capital
	[A]	[B = A – Inventory – Prepaid Assets]	[C]	[D = A/C]	[E = B/C]	[F = A – C]
Beginning	$                       1,200,000.00	$             654,546.00	$                   545,455.00	2.20	1.2	$                                               654,545.00
May-02	$                             75,000.00		$                     75,000.00
Balance	$                       1,275,000.00	$             654,546.00	$                   620,455.00	2.05	1.05	$                                               654,545.00
May-08	$                             80,000.00	$             140,000.00
Balance	$                       1,355,000.00	$             794,546.00	$                   620,455.00	2.18	1.28	$                                               734,545.00
May-10	$                                            -	$                              -
Balance	$                       1,355,000.00	$             794,546.00	$                   620,455.00	2.18	1.28	$                                               734,545.00
May-15	$                           (28,000.00)	$             (28,000.00)	$                   (28,000.00)
Balance	$                       1,327,000.00	$             766,546.00	$                   592,455.00	2.24	1.29	$                                               734,545.00
May-17	$                                            -	$                              -
Balance	$                       1,327,000.00	$             766,546.00	$                   592,455.00	2.24	1.29	$                                               734,545.00
May-22			$                     59,000.00
Balance	$                       1,327,000.00	$             766,546.00	$                   651,455.00	2.04	1.18	$                                               675,545.00
May-26	$                           (59,000.00)	$             (59,000.00)	$                   (59,000.00)
Balance	$                       1,268,000.00	$             707,546.00	$                   592,455.00	2.14	1.19	$                                               675,545.00
May-27	$                           100,000.00	$             100,000.00	$                   100,000.00
Balance	$                       1,368,000.00	$             807,546.00	$                   692,455.00	1.98	1.17	$                                               675,545.00
May-28	$                           125,000.00	$             125,000.00	$                                    -
Balance	$                       1,493,000.00	$             932,546.00	$                   692,455.00	2.16	1.35	$                                               800,545.00
May-29	$                        (225,000.00)	$          (225,000.00)
Balance	$                       1,268,000.00	$             707,546.00	$                   692,455.00	1.83	1.02	$                                               575,545.00