Question

The following balance sheet data are reported for Brownlee Catering at September 30, 2015

Accounts receivable ... $17,000

Notes payable ... $12,000

Equipment ... $34,000

Supplies Inventory ... $9,000

Accounts payable $24,000

Cash ... $10,000

Common Stock ... $27,500

Retained earnings ... ?

Assume that on October 1, 2015, only the two following transactions occurred:

October 1 - Purchased additional equipment costing $11,000 , giving $3,000 cash and signing an $8,000 note payable

Declared and paid a cash dividend of $3,000

__________

a. Prepare Brownlee Catering’s balance sheet at September 30, 2015

b. Prepare the company’s balance sheet at the close of the business on October 1, 2015

c. Calculate Brownlee’s current and quick ratios on September 30 and October 1 (assume notes payable are non current).

d. The October 1, 2015 transactions have decreased Brownlee’s current and quick ratios, reflecting a decline in liquidity. Identify two transactions that would increase the company’s liquidity

Answer 1

a. Total assets = accounts receivable+equipment+inventory+cash

= 17000+34000+9000+10000

= $70,000

Total liabilities and equity = notes payable+accounts payable+common stock+retained earnings

= 12000+24000+27500+retained earnings

= 63500+retained earnings

As we know that total assets = total liabilities+equity

So, 70,000 = 63500+retained earnings

Or retained earnings = 70000-63500 = $6500. Thus retained earnings = 6500

On this basis the balance sheet is prepared and shown below:

Assets	$	Liabilities & Stockholder's equity	$
Current assets:		Current liability:
Cash	10,000.00	Accounts payable	24,000.00
Accounts receivable	17,000.00	Total current liabilities	24,000.00
Supplies inventory	9,000.00	Notes payable	12,000.00
Total current assets	36,000.00	Total liabilities	36,000.00
		Stockholder's equity
Non current assets:		Common stock	27,500.00
Equipment	34,000.00	Retained earnings	6,500.00
		Total stockholder's equity	34,000.00
Total assets	70,000.00	Total liabilities and stockholder's equity	70,000.00

b.  

Assets	$	Liabilities & Stockholder's equity	$
Current assets:		Current liability:
Cash	4,000.00	Accounts payable	24,000.00
Accounts receivable	17,000.00	Total current liabilities	24,000.00
Supplies inventory	9,000.00	Notes payable	20,000.00
Total current assets	30,000.00	Total liabilities	44,000.00
		Stockholder's equity
Non current assets:		Common stock	27,500.00
Equipment	45,000.00	Retained earnings	3,500.00
		Total stockholder's equity	31,000.00
Total assets	75,000.00	Total liabilities and stockholder's equity	75,000.00

Explanation:

Equipment = 34000+11000 = 45000

Cash = 10,000 - 3,000 (for equipment) - 3000 (for dividend)

Notes payable = 12000 + 8000 (for equipment)

Retained earnings = 6500-3000 (for dividend)

c. Current ratio = Total current assets/total current liabilities

	September 30	October 1
Total current assets	36,000.00	30,000.00
Total current liabilities	24,000.00	24,000.00
Current ratio	1.50	1.25

Quick ratio = (total current assets - inventories)/total current liabilities

	September 30	October 1
Total current assets	36,000.00	30,000.00
Inventory	9,000.00	9,000.00
Current assets - inventory	27,000.00	21,000.00
Total current liabilities	24,000.00	24,000.00
Quick ratio	1.13	0.88

d. The two transactions that will increase the company's liquidity are: (i) sale of equipment for cash - here the amount of cash will increase and so the company's current assets will increase, thus improving its liquidity. (ii) paying off some of the accounts payable with cash. For example when $4000 of accounts payable is paid on September 30 in cash then the balance sheet will become:

Assets	$	Liabilities & Stockholder's equity	$
Current assets:		Current liability:
Cash	6,000.00	Accounts payable	20,000.00
Accounts receivable	17,000.00	Total current liabilities	20,000.00
Supplies inventory	9,000.00	Notes payable	12,000.00
Total current assets	32,000.00	Total liabilities	32,000.00
		Stockholder's equity
Non current assets:		Common stock	27,500.00
Equipment	34,000.00	Retained earnings	6,500.00
		Total stockholder's equity	34,000.00
Total assets	66,000.00	Total liabilities and stockholder's equity	66,000.00

Here current ratio = 32,000/20,000 = 1.60.