Question

Howell Company has the following selected accounts after posting adjusting entries:                                          
                                          
Accounts Payable $55,000                               
Notes Payable, 3-month 80,000                              
Accumulated Depreciation—Equipment           14,000                              
Payroll and Benefits Payable 27,000                              
Notes Payable, 5-year, 8% 30,000                              
Estimated Warranty Liability 34,000                              
Payroll Tax Expense 6,000                              
Interest Payable 3,000                              
Mortgage Payable 200,000                              
Sales Tax Payable 21,000                              
                                          
Instructions                                          
(a) Prepare the current liability section of Howell Company's balance sheet, assuming $25,000 of the mortgage is payable next year. (List liabilities in magnitude order, with largest first.)                                          
(b) Comment on Howell 's liquidity, assuming total current assets are $450,000                                          

Answer 1

Requirement a:-

Current liability section of the Howell company balance sheet is setup as follows:-

Howell Company
Balance Sheet
	Amount
Current Liabilities
Notes Payable, 3 month	80,000
Accounts Payable	55,000
Estimated Warranty Liability	34,000
Payroll and Benefits payable	27,000
Mortgage Payable(current portion)	25,000
Sales tax payable	21,000
Interest Payable	3,000
Total Current Liabilities	245,000

Please note that in the absence of information to the contrary, Estimated warranty liability are included as part of the current liabilities as they represent the obligations of the company in the near future. Additionally, the we have included the mortgage payable of $25,000 in the current liabilities section as they are supposed to be paid out next year.

Requirement b:-

Current Ratio = Current Assets/Current Liabilities

=$450,000/$245,000

=1.836 times

=1.84 times(Rounded)

Howell company has a healthy current ratio of 1.84 times. This means, that the company has $1.84 of current assets for every $1 of its current liability. Based on this ratio, it is observable that the company would not face any difficulty with respect to its short term obligations as they come due.