Decort Company\'s working capital accounts at December 31, 2012, are given below
ID: 2332448 • Letter: D
Question
Decort Company's working capital accounts at December 31, 2012, are given below:
Current Assets:
Cash
$100,000
Marketable Securities
50,000
Accounts Receivable
$250,000
Less Allowance for Doubtful Accounts
(20,000)
230,000
Inventory, LIFO
300,000
Prepaid
8,000
Total Current Assets
$688,000
Current Liabilities:
Accounts Payable
$200,000
Notes Payable
50,000
Taxes Payable
10,000
Accrued Liabilities
30,000
Total Current Liabilities
$290,000
During 2013, DeCort Company completed the following transactions:
Purchased fixed assets for cash, $20,000.
Exchanged DeCort Company common stock for land. Estimated value of transaction, $80,000.
Payment of $40,000 on short-term notes payable.
Sold marketable securities costing $20,000 for $25,000 cash.
Sold DeCort Company common stock for $70,000.
Wrote off an account receivable in the amount of $20,000.
Declared a cash dividend in the amount of $5,000.
Paid the above cash dividend.
Sold inventory costing $10,000 for $15,000 cash.
Sold inventory costing $5,000 for $8,000 on account.
Paid accounts payable in the amount of $20,000.
Sold marketable securities costing $20,000 for $20,000 cash.
Issued a credit memo on an account receivable, $1,000.
Compute the following as of December 31, 2012:
Working capital
Current ratio
Acid-test ratio (conservative)
Cash ratio
(These ratios are to be computed using only the December 31, 2012 data.)
For 2013, indicate the effect of each of the transactions given on working capital, current ratio, acid-test ratio, and cash ratio. Give the effect in terms of +, , or none. Consider each transaction to be the first transaction of the year. Assume at the start of the year that the current ratio is over 2 to 1, the acid-test ratio is over 1 to 1, and the cash ratio is less than 1 to 1.
Format:
The Effect On
Working
Current
Acid-Test
Cash
Transaction
Capital
Ratio
Ratio
Ratio
Current Assets:
Cash
$100,000
Marketable Securities
50,000
Accounts Receivable
$250,000
Less Allowance for Doubtful Accounts
(20,000)
230,000
Inventory, LIFO
300,000
Prepaid
8,000
Total Current Assets
$688,000
Current Liabilities:
Accounts Payable
$200,000
Notes Payable
50,000
Taxes Payable
10,000
Accrued Liabilities
30,000
Total Current Liabilities
$290,000
Explanation / Answer
1. Calculation of Working Capital USD Current Assets: Cash 100,000 Marketable Securities 50,000 Accounts Receivable after deducting allowance for Doubtful accounts 230,000 Inventory 300,000 Prepaid 8,000 Total Current Assets 688,000 Current Liabilities Accounts Payable 200000 Notes Payable 50000 Taxes Payable 10000 Accrued Liabilities 30000 Total Current Liabilities 290000 Working Capital = Current Assets Minus Current Liabilities 398,000 Calculation of Current Ratio Current ratio is calculated by dividing current assests by current Liabilites Current Assets 688000 Current Liabilites 290000 Current Ratio 2.37:1 Calculation of Acid Test Ratio Acid test ratio = Quick Assets (Current assets- Stocks-Prepaid Expenses)/Current liabilites Cash 100000 Marketable Securities 50000 Accounts Receivable 230000 380000 Current Liabilities 290000 Acid test ratio 1.3 Cash Ratio = Cash plus marketable secruities/ Current Liabilites Cash 100000 Marketable secruities 50000 150000 Current Liabilites 290000 Cash Ratio 0.52
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