Exercise 2-8 (Essey) tens are fr Farview Corporation #xear4nd, My 31, 2017. Sala

Question

Exercise 2-8 (Essey) tens are fr Farview Corporation #xear4nd, My 31, 2017. Salanes and wages payable Salanies and wages expense 2,080 Supples expense Accounits payable Rent reverue Notes payable (due in 2020) Deprediation expense Retained eannings beginning of the year) 34,000 Fairview Cerporation did not issue any new stock duing the year (d) Slepose that you are the t of Linar toanet, manager has umahed mah apgaus, of equipment to F to provide a hew thhs loan would change Farview's ouent atio and dabt to assets ratie, and dsoms whether you would make the sale

Explanation / Answer

Current Ratio = Current assets/Current liabilities Current assets Cash $29,200 Accounts Receivable $9,780 $38,980 Current Liabilities Salaries and Wages payable $2,080 Accounts Payable $4,100 $6,180 Current Ratio - 38980/6180 6.31 times Debt to asset ratio - Total Liabilities/Total assets Total Liabilities Current liabilities $6,180 Notes Payable $1,800 $7,980 Total Assets Current assets $38,980 Equipment (18500-6000) 12500 Total Assets $51,480 Debt to assets ratio - $7980/$51480 15.50% With the sale of equipment the current ratio will not change as equipment are fixed assets and notes payable is long term liability Debt to assets ratio - $27980/$71480 39.14% The debt to assets ratio would increase to 39.14% from 15.50% Based on debt to assets ratio the sale is preferable since the assets to debt ratio of 15.50% is lower But it can also be seen that the company has made loss for the current year of $ 2500 (66100+8500-57500-15600-4000) which may make it difficult for the company to repay the notes and interest on the note Based on the loss of the company it would be not preferable for the company to sell the equipment unless the company is able to explain the loss and if it is willing to make a down payment for the equipment

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