Selected amounts from Reingold Company’s balance sheet from the beginning of the

Question

Selected amounts from Reingold Company’s balance sheet from the beginning of the year follow:

  Cash

$

56,000

  Marketable Securities

$

5,000

  Accounts receivable, net

$

316,400

  Inventory

$

423,600

  Prepaid expenses

$

5,200

  Plant and equipment, net

$

810,000

  Accounts payable

$

174,800

  Accrued liabilities

$

47,400

  Notes due within one year

$

72,000

  Bonds payable in five years

$

126,000

During the year, the company completed the following transactions:

x.

Purchased inventory on account, $39,500.

a.

Declared a cash dividend, $16,000.

b.

Paid accounts payable, $77,600.

c.

Collected cash on accounts receivable, $64,600.

d.

Purchased equipment for cash, $63,800.

e.

Paid a cash dividend previously declared, $16,000.

f.

Borrowed cash on a short-term note with the bank, $39,000.

g.

Sold inventory costing $58,800 for $86,000, on account.

h.

Wrote off uncollectible accounts in the amount of $4,400 reducing the accounts receivable balance accordingly.

i.

Sold marketable securities costing $5,000 for cash, $3,400.

j.

Issued additional shares of common stock for cash, $172,000.

k.

Paid off all short-term notes due, $111,000.

Required:

1.

Compute the following amounts and ratios as of the beginning of the year:

a.

Working capital_____

b.

Current ratio. (Round your answer to 2 decimal places.)

c.

Acid-test ratio. (Round your answer to 2 decimal places.)

2.

Indicate the effect of each of the transactions given above on working capital, the current ratio, and the acid-test ratio. Give the effect in terms of increase, decrease, or none. Item (x) is given as an example: Consider each transaction independently and indicate their effects as compared to the ratios and amounts at the beginning of the period.

Transaction

Working capital

Current Ratio

Acid-test Ratio

Purchased inventory on account

None

Decrease

Decrease

Declared a cash dividend

Paid account payable

Collected cash on accounts receivable

Purchase equipment for cash

Paid a cash dividend previously declared

Borrowed cash on short term note with bank

Sold inventory on account at more than it cost

Wrote off uncollectable accounts

Sold marketable securities at less than it cost

Issued addition share of common stock for cash

Paid of short term notes

Selected amounts from Reingold Company’s balance sheet from the beginning of the year follow:

Explanation / Answer

Ratios as on beginning of the year Working Capital = Current Assets- Current Liabilities Current Assets Cash 56000 Marketable Securities 5000 Accounts Receivable 316400 Inventory 423600 Prepaid Expenses 5200 Total 806200 Current Liabilities Accounts Payable 174800 Notes Due within one year 72000 Total 246800 Working Capital = 806200-246800 = 559400 Working Capital is $ 559400 Current Ratio = Current assets / Current Liabilities = 806200/246800 = 3.266613 Current Asset Ratio is 3.3 approximately

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