Denna Company’s working capital accounts at the beginning of the year follow: Du

Question

Denna Company’s working capital accounts at the beginning of the year follow:

During the year, Denna Company completed the following transactions:

Paid a cash dividend previously declared, $12,000.

Issued additional shares of common stock for cash, $100,000.

Sold inventory costing $50,000 for $80,000, on account.

Wrote off uncollectible accounts in the amount of $10,000, reducing the accounts receivable balance accordingly.

Declared a cash dividend, $15,000.

Paid accounts payable, $50,000.

Borrowed cash on a short-term note with the bank, $35,000.

Sold inventory costing $15,000 for $10,000 cash.

Purchased inventory on account, $60,000.

Paid off all short-term notes due, $30,000.

Purchased equipment for cash, $15,000.

Sold marketable securities costing $18,000 for cash, $15,000.

Collected cash on accounts receivable, $80,000.

Required:

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

a. Working capital.

b. Current ratio.

c. Acid-test ratio.

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.

Cash $ 50,000 Marketable securities $ 30,000 Accounts receivable, net $ 200,000 Inventory $ 210,000 Prepaid expenses $ 10,000 Accounts payable $ 150,000 Notes due within one year $ 30,000 Accrued liabilities $ 20,000

Explanation / Answer

Solution 1 (a) Calculation of Working Capital Particulars Amount Totals A) Current Assets Cash 50,000 Marketable securities 30,000 Accounts receivable, net 2,00,000 Inventory 2,10,000 Prepaid expenses 10,000 5,00,000 B) Current Liabilities Accounts payable 1,50,000 Notes due within one year 30,000 Accrued liabilities 20,000 2,00,000 Working Capital (A-B) 3,00,000 1 (b) Current Ratio= Current Assets/ Current Liabilities                          = 500000/200000                          =2.5:1 1 © Acid test ratio= Liquid Assets / Current Liabilities                              =280000/200000                              =1.4 Liquid Assets= Current Assets- Inventory-prepaid expenses                            =500000-210000-10000                             =280000 Solution 2 S.no Effect of each transactions Effect on W.C. Effect on Current ratio Effect on Acid test ratio 1 Paid a cash dividend previously declared, $12,000. No effect Increase Increase 2 Issued additional shares of common stock for cash, $100,000. Increase Increase Increase 3 Sold inventory costing $50,000 for $80,000, on account. Increase Increase Increase 4 Wrote off uncollectible accounts in the amount of $10,000, reducing the accounts receivable balance accordingly. Decrease Decrease Decrease 5 Declared a cash dividend, $15,000. Decrease Decrease Decrease 6 Paid accounts payable, $50,000. No effect Increase Increase 7 Borrowed cash on a short-term note with the bank, $35,000. No effect Decrease Decrease 8 Sold inventory costing $15,000 for $10,000 cash. Decrease Decrease Increase 9 Purchased inventory on account, $60,000. No effect Decrease Decrease 10 Paid off all short-term notes due, $30,000. No effect Increase Increase 11 Purchased equipment for cash, $15,000. Decrease Decrease Decrease 12 Sold marketable securities costing $18,000 for cash, $15,000. Decrease Decrease Decrease 13 Collected cash on accounts receivable, $80,000. No effect no effect no effect

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