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Data pertaining to the current position of Forte Company follow: Cash $400,000 M

ID: 2591730 • Letter: D

Question

Data pertaining to the current position of Forte Company follow:

Cash

$400,000

Marketable securities

162,500

Accounts and notes receivable (net)

325,000

Inventories

750,000

Prepaid expenses

46,000

Accounts payable

230,000

Notes payable (short-term)

260,000

Accrued expenses

295,000

1.

Compute (A) the working capital, (B) the current ratio, and (C) the quick ratio. Round ratios to one decimal place.

2.

Compute the working capital, the current ratio, and the quick ratio after each of the following transactions and record the results in the appropriate columns of the table provided. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place.

A.

Sold marketable securities at no gain or loss, 70,000.

B.

Paid accounts payable, 140,000.

C.

Purchased goods on account, 115,000.

D.

Paid notes payable, 115,000.

E.

Declared a cash dividend, 150,000.

F.

Declared a common stock dividend on common stock, 50,000.

G.

Borrowed cash from bank on a long-term note, 210,000.

H.

Received cash on account, 115,000.

I.

Issued additional shares of stock for cash, 630,000.

J.

Paid cash for prepaid expenses, 8,000.

1.

Compute the following. Round ratios to one decimal place

A.

Working capital:

B.

Current ratio:

C.

Quick ratio:

2. Compute the working capital, the current ratio, and the quick ratio after each of the following transactions and record the results in the appropriate columns of the table provided. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place.

Working

Current

Quick

Transaction

Capital

Ratio

Ratio

A.

B.

C.

D.

E.

F.

G.

H.

I.

J.

Cash

$400,000

Marketable securities

162,500

Accounts and notes receivable (net)

325,000

Inventories

750,000

Prepaid expenses

46,000

Accounts payable

230,000

Notes payable (short-term)

260,000

Accrued expenses

295,000

1.

Compute (A) the working capital, (B) the current ratio, and (C) the quick ratio. Round ratios to one decimal place.

2.

Compute the working capital, the current ratio, and the quick ratio after each of the following transactions and record the results in the appropriate columns of the table provided. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place.

A.

Sold marketable securities at no gain or loss, 70,000.

B.

Paid accounts payable, 140,000.

C.

Purchased goods on account, 115,000.

D.

Paid notes payable, 115,000.

E.

Declared a cash dividend, 150,000.

F.

Declared a common stock dividend on common stock, 50,000.

G.

Borrowed cash from bank on a long-term note, 210,000.

H.

Received cash on account, 115,000.

I.

Issued additional shares of stock for cash, 630,000.

J.

Paid cash for prepaid expenses, 8,000.

1.

Compute the following. Round ratios to one decimal place

A.

Working capital:

B.

Current ratio:

C.

Quick ratio:

Explanation / Answer

Solution 1

(A)Working capital = Total Current Assets – Total Current Liabilities

                                    = $ 1,683,500 - $ 785,000

                                    = $ 898,500     (Answer)

Working Notes:

Total Current Assets

Total Current Liabilities

= Cash + Marketable securities + Accounts and notes receivable (net) + Inventories+ Prepaid expenses

= $ 400,000 + 162,500 + 325,000 + 750,000+ 46,000

= $ 1,683,500

= Accounts payable + Notes payable (short-term) + Accrued expenses

= $ 230,000 + 260,000 + 295,000

= $ 785,000

(B)Current Ratio = Total Current Assets / Total Current Liabilities

                              = $ 1,683,500 / $ 785,000

                              = 2.1:1    (Answer)

Working Notes:

Total Current Assets

Total Current Liabilities

= Cash + Marketable securities + Accounts and notes receivable (net) + Inventories+ Prepaid expenses

= $ 400,000 + 162,500 + 325,000 + 750,000+ 46,000

= $ 1,683,500

= Accounts payable + Notes payable (short-term) + Accrued expenses

= $ 230,000 + 260,000 + 295,000

= $ 785,000

(C)Quick Ratio = Quick Assets* / Total Current Liabilities

                         = $ 887,500 / $ 785,000

                         = 1.1: 1    (Answer)

Working Notes:

*Quick Assets= Total Current Assets – Prepaid expenses –Inventories

Quick Assets

Total Current Liabilities

= Total Current Assets – Prepaid expenses -Inventories

= $ 1,683,500 – 46,000 -750,000

= $ 887,500

= Accounts payable + Notes payable (short-term) + Accrued expenses

= $ 230,000 + 260,000 + 295,000

= $ 785,000

Solution 2

Amounts referred from solution 1 (And recording changes in that, after each transaction given)

Total Current Assets= $ 1,683,500

Total Current Liabilities = $ 785,000

Quick Assets=$ 887,500

Working capital = $ 898,500    

Current Ratio = 2.1:1   

Quick Ratio=1.1: 1    

Formulas’ Used:

Working capital = Total Current Assets – Total Current Liabilities

Current Ratio = Total Current Assets / Total Current Liabilities

Quick Ratio = Quick Assets* / Total Current Liabilities

*Quick Assets= Total Current Assets – Prepaid expenses –Inventories

Impact on Current Assets and Liabilities

Working

Current

Quick

Transaction

(Additional Information)

Capital

Ratio

Ratio

A.

Marketable securities (Current Asset): Decrease by $ 70,000.

Cash (Current Asset): Increase by $ 70,000.

= $ 1,683,500- $ 785,000

= $ 898,500   (Answer)

Working Notes:

Total Current Assets

= $ 1,683,500 - $ 70,000 + $ 70,000

= $ 1,683,500

Total Current Liabilities

= $ 785,000

= $ 1,683,500 / $ 785,000

= 2.1:1    (Answer)

=$ 887,500 / $ 785,000

= 1.1: 1    (Answer)

Working Notes:

Quick Assets

= $ 1,683,500 -46,000 -750,000

=$ 887,500

Total Current Liabilities

= $ 785,000

B.

Accounts Payable (Current Liability): Decrease by $ 140,000.

Cash (Current Asset):

Decrease by $ 140,000.

= $ 1,543,500 - $ 645,000

=$ 898,500 (Answer)

Working Notes:

Total Current Assets

= $ 1,683,500 - $ 140,000

= $ 1,543,500

Total Current Liabilities

= $ 785,000 - $ 140,000

=$ 645,000

= $ 1,543,500 / $ 645,000

= 2.4 :1

(Answer)

= $ 747,500 / $ 645,000

= 1.2:1

Working Notes:

Quick Assets

= $ 1,543,500-46,000 -750,000

= $ 747,500

Total Current Liabilities

=$ 645,000

C.

Inventories (Current Asset): Increase by $ 115,000

Accounts Payable (Current Liability): Increase by $ 115,000

=$ 1,798,500 -$ 900,000

= $ 898,500 (Answer)

Working Notes:

Total Current Assets

= $ 1,683,500 + $ 115,000

= $ 1,798,500

Total Current Liabilities

= $ 785,000 + $ 115,000

=$ 900,000

=$ 1,798,500 / $ 900,000

= 2.0:1 (Answer)

= $ 887,500 / $ 900,000

= 0.9:1 (Answer)

(Or you can write 1:1 as actual answer is 0.99)

Working Notes:

Quick Assets

=$ 1,798,500 -46,000 -865,000*

= $ 887,500

Total Current Liabilities

=$ 900,000

*New Inventories

= $ 750,000 + 115,000

=$ 865,000

D.

Notes Payable (Current Liability): Decrease by $ 115,000.

Cash (Current Asset):

Decrease by $ 115,000.

= $ 1,568,500-$ 670,000

= $ 898,500 (Answer)

Working Notes:

Total Current Assets

= $ 1,683,500 - $ 115,000

= $ 1,568,500

Total Current Liabilities

= $ 785,000 - $ 115,000

=$ 670,000

= $ 1,568,500 / $ 670,000

= 2.3 :1 (Answer)

=$ 772,500 / $ 670,000

= 1.2 : 1

(Answer)

Working Notes:

Quick Assets

= $ 1,568,500-46,000 -750,000

= $ 772,500

Total Current Liabilities

=$ 670,000

E.

Dividend payable (Current Liability): Increase by $ 150,000.

Current Asset: No effect as dividend is not yet paid

= $ 1,683,500- $ 935,000

= $ 748,500

(Answer)

Working Notes:

Total Current Assets

= $ 1,683,500

Total Current Liabilities

= $ 785,000 + $ 150,000

=$ 935,000

=$ 1,683,500 / $ 935,000

=1.8:1 (Answer)

=$ 887,500 / $ 935,000

= 0.9: 1 (Answer)

(Or you can write 1:1 as actual answer is 0.94)

Working Notes:

Quick Assets

= $ 1,683,500 -46,000 -750,000

=$ 887,500

Total Current Liabilities

=$ 935,000

F.

Dividend payable (Current Liability): Increase by $ 50,000.

Current Asset: No effect as dividend is to be given in kind (That is stock)

= $ 1,683,500- $ 835,000

= $ 848,500

(Answer)

Working Notes:

Total Current Assets

= $ 1,683,500

Total Current Liabilities

= $ 785,000 + $ 50,000

=$ 835,000

=$ 1,683,500 / $ 835,000

=2.0:1 (Answer)

=$ 887,500 / $ 835,000

= 1.1: 1 (Answer)

Working Notes:

Quick Assets

= $ 1,683,500 -46,000 -750,000

=$ 887,500

Total Current Liabilities

=$ 835,000

G.

Current Liability: No effect as long term loan borrowed

Cash (Current Asset): Increase by $ 210,000

= $ 1,893,500-$ 785,000

= $ 1,108,500 (Answer)

Working Notes:

Total Current Assets

= $ 1,683,500 + $ 210,000

= $ 1,893,500

Total Current Liabilities

= $ 785,000

=$ 1,893,500/ $ 785,000

=2.4:1

(Answer)

=$ 1,097,500 / $ 785,000

= 1.4: 1 (Answer)

Working Notes:

Quick Assets

= $ 1,893,500-46,000 -750,000

=$ 1,097,500

Total Current Liabilities

=$ 785,000

H.

Accounts Receivable (Current Asset): Decrease by $ 115,000.

Cash (Current Asset):

Increase by $ 115,000.

= $ 1,683,500-$ 785,000

= $ 898,500 (Answer)

Working Notes:

Total Current Assets

= $ 1,683,500 - $ 115,000 + $ 115,000

= $ 1,683,500

Total Current Liabilities

=$ 785,000

= $ 1,683,500 / $ 785,000

= 2.1:1   (Answer)

=$ 887,500 / $ 785,000

= 1.1: 1 (Answer)

Working Notes:

Quick Assets

= $ 1,683,500 -46,000 -750,000

=$ 887,500

Total Current Liabilities

= $ 785,000

I.

Current Liability : No effect as stock is part of shareholder's equity.

Cash (Current Asset): Increase ny $ 630,000

=$ 2,313,500-$ 785,000

= $ 1,528,500 (Answer)

Working Notes:

Total Current Assets

= $ 1,683,500 + $ 630,000

= $ 2,313,500

Total Current Liabilities

=$ 785,000

=$ 2,313,500 / $ 785,000

= 2.9:1 (Answer)

=$ 1,517,500 / $ 785,000

= 1.9: 1 (Answer)

Working Notes:

Quick Assets

= $ 2,313,500 -46,000 -750,000

=$1,517,500

Total Current Liabilities

= $ 785,000

J.

Prepaid expenses (Current Asset) :Decrease by $ 8,000

Cash (Current Asset): Decrease by $ 8,000

Total Decrease in Current Assets $ 16,000

Current Liability :No effect

=$ 1,667,500-$ 785,000

= $ 882,500 (Answer)

Working Notes:

Total Current Assets

= $ 1,683,500 - $ 8,000- $ 8,000

= $ 1,667,500

Total Current Liabilities

=$ 785,000

= $ 1,667,500 / $ 785,000

= 2.1 :1 (Answer)

=$ 879,500 / $ 785,000

= 1.1: 1 (Answer)

Working Notes:

Quick Assets

= $ 1,667,500 -38,000* -750,000

=$879,500

Total Current Liabilities

= $ 785,000

*New prepaid expenses= $ 46,000 -$ 8,000

= $ 38,000

Total Current Assets

Total Current Liabilities

= Cash + Marketable securities + Accounts and notes receivable (net) + Inventories+ Prepaid expenses

= $ 400,000 + 162,500 + 325,000 + 750,000+ 46,000

= $ 1,683,500

= Accounts payable + Notes payable (short-term) + Accrued expenses

= $ 230,000 + 260,000 + 295,000

= $ 785,000