Question

The following amounts were reported on the December 31, 2019, balance sheet:

Cash $ 16,000
Accounts receivable 44,000
Common stock 80,000
Wages payable 10,000
Retained earnings 160,000
Land 40,000
Accounts payable 30,000
Bonds payable 240,000
Merchandise inventory 60,000
Buildings and equipment, net of accumulated depreciation 360,000
Required:
a. Calculate working capital at December 31, 2019.
b. Calculate the current ratio at December 31, 2019.
c. Calculate the acid-test ratio at December 31, 2019. (Round your answer to 1 decimal place.)

Answer 1

The working capital at December 31, 2019 is $80,000. The current ratio at December 31, 2019 is 3. The acid-test ratio at December 31, 2019 is 1.5.

Step-by-step explanation:

a. Working Capital:

Working capital is calculated by subtracting current liabilities from current assets:

Working Capital = Current Assets - Current Liabilities

Given the information provided:

Current Assets = Cash + Accounts Receivable + Merchandise Inventory = $16,000 + $44,000 + $60,000 = $120,000

Current Liabilities = Wages Payable + Accounts Payable = $10,000 + $30,000 = $40,000

Working Capital = $120,000 - $40,000 = $80,000

b. Current Ratio:

The current ratio is calculated by dividing current assets by current liabilities:

Current Ratio = Current Assets / Current Liabilities

Current Ratio = $120,000 / $40,000 = 3

c. Acid-Test Ratio:

The acid-test ratio, also known as the quick ratio, is calculated by subtracting inventory from current assets and dividing the result by current liabilities:

Acid-Test Ratio = (Current Assets - Inventory) / Current Liabilities

Acid-Test Ratio = ($120,000 - $60,000) / $40,000 = 1.5

Answer 2

a. $50,000

b. 2.25 times

c. 0.75 times

Step-by-step explanation:

a. The formula to compute the working capital is shown below:

Working capital = Current assets - current liabilities

where,

Current assets = Cash + accounts receivable + merchandise inventory

= $16,000 + $44,000 + $60,000

= $90,000

And, the current liabilities would be

= Wages payable + accounts payable

= $10,000 + $30,000

= $40,000

Now put these values to the above formula

So, the value would be equal to

= $90,000 - $40,000

= $50,000

b. Current ratio = Total Current assets ÷ total current liabilities

= $90,000 ÷ $40,000

= 2.25 times

c. Acid-test ratio = Total Current assets - merchandise inventory ÷ total current liabilities

= $90,000 - $60,000 ÷ $40,000

= 0.75 times