HYDRO COMPANY Balance Sheet December 31, 2015 Cash Accounts receivable (net) Inv
ID: 2517106 • Letter: H
Question
HYDRO COMPANY Balance Sheet December 31, 2015 Cash Accounts receivable (net) Inventory Plant and equipment (net) Total assets $40,000 Current liabilities 80,000 130,000 Common Stock 250,000 $500,000 $80,000 120,000 200,000 100,000 $500,000 1096 Bonds payable Retained earnings Total Liabilities and Stockholders' Equity Sales revenues for 2015 were $800,000, gross profit was $320,000, and net income was $36,000. The income tax rate was 40 percent. One year ago, accounts receivable (net) were $76,000, inventory was $110,000, total assets were $460,000, and stockholders' equity was $260,000. The bonds payable were outstanding all year and the 2015 interest expense was $12,000. The current ratio of Hydro Company at 12/31/2015, calculated using the above data, was 3.13 and the company's working capital was $170,000. Which of the following would happen if the firm paid off $20,000 of its current liabilities on January 1, 2016? Select one: The current ratio would increase, but working capital would remain the same. Both the current ratio and working capital would increase Both the current ratio and working capital would decrease. The current ratio would increase, but working capital would decrease. OExplanation / Answer
Answer:
Explanation:
Total Current assets = 40000 +80000+130000 = $250000
Total Current Liabilities = $80000
Current Ratio = Current assets / Current Liabilities
= 250000 / 80000 = 3.13
Working Capital = Current assets - Current Liabilities
= 250000 - 80000
= $170000
If firm paid off $20000 of its Current Liabilities
Revised Current Liabilities = 80000 - 20000 = $60000
Revised Current ratio = 250000 / 60000
= 4.17
Revised Working Capital = 250000 – 60000
= $190000
In this situation, both current ratio and working capital has bee increased.
Hence, the right option is
Both the Current Ratio and Working Capital would increase.
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