Problem: In its most recent annual report, Appalachian Beverages reported curren

Question

Problem:
In its most recent annual report, Appalachian Beverages reported current assets of $54,000 and a current ratio of 1.80. Assume that the following transactions were completed: (1) purchased merchandise for $6,000 on account, and (2) purchased a delivery truck for $10,000, paying $1,000 cash and signing a two-year promissory note for the balance.

Compute the updated current ratio (round answers to 2 decimal places)
Transaction (1) ________________
Transaction (2) ________________

I am not sure how to do this problem, I understand how to general compute the current ration:

Current raion= currenct assets/current liabilities

but how do you do compute an update?

If someone could show me how to do this correctly, I will award them lifesaver.

Thanks.

Explanation / Answer

The following changes will be made with the completed transactions. 1) Purchased merchandise for $6,000 on account indicates that the inventory level increased by $6,000 and Accounts payable increased by $6,000. Here there is no effect on cash as there is no cash inflow or outflow. Increase of Current assets by $6,000 Increase of Current liabilities by $6,000 2) Purchased a delivery truck for $10,000 paying $1,000 cash and signing a two-year promissory note for the balance indicates that there is a cash outflow of $1,000 and the cash balance will come down by $1,000. Since he issued a 2-year promissory note for the remaninig amount $9,000, it becomes the long-term liability. Therefore, Notes payable is increased by $9,000. The fixed assets will increase by $10,000 and the current assets will decrease by $1,000 and the long-term liabilities will increase by $9,000. according to the given information, Current assets = $54,000 Current ratuiio = 1.8 Calculating the Current liabilities from Current ratio: Current ratio = Current assets / Current liabilities 1.8 = $54,000 / CL Current liabilities = $54,000 / 1.8 = $30,000 Therefore, the Current liabilities are $30,000 Now we shall see the effect of transaction-1 on Current assets and Current liabilities: Increase of Current assets by $6,000 Increase of Current liabilities by $6,000 Therefore, New Current assets = $60,000 New Current liabilities = $36,000 New Current ratio = Current assets / Current liabilities = $60,000 / $36,000 = 1.67 Now we shall see the effect of transaction-2 on Current assets and Current liabilities: The fixed assets will increase by $10,000 and the current assets will decrease by $1,000 and the long-term liabilities will increase by $9,000. The overall effect is decreased of Current assets by $1,000.There is no effect on Current liabilities. New current assets = $53,000 New current liabilities = $30,000 New current ratio = Current assets / Current liabilities = $53,000 / $30,000 = 1.76

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