Question

On June 30, Year 3, Fanning Company’s total current assets were $495,500 and its total current liabilities were $271,500. On July 1, Year 3, Fanning issued a short-term note to a bank for $40,200 cash. Required: Compute Fanning’s working capital before and after issuing the note. Compute Fanning’s current ratio before and after issuing the note. Note: Round your answers to 2 decimal places.

Answer 1

Fanning's working capital before issuing the note is $224,000 and after issuing the note is $455,300. The current ratio before issuing the note is 1.82 and after issuing the note is 1.58.

Step-by-step explanation:

To calculate Fanning's working capital before issuing the note, subtract the total current liabilities from the total current assets. Therefore, the working capital before issuing the note is $495,500 - $271,500 = $224,000.

To calculate Fanning's working capital after issuing the note, subtract the short-term note from the total current assets. Therefore, the working capital after issuing the note is $495,500 - $40,200 = $455,300.

To calculate Fanning's current ratio before issuing the note, divide the total current assets by the total current liabilities. Therefore, the current ratio before issuing the note is $495,500 / $271,500 ≈ 1.82.

To calculate Fanning's current ratio after issuing the note, divide the total current assets - short-term note by the total current liabilities. Therefore, the current ratio after issuing the note is $495,500 - $40,200 / $271,500 ≈ 1.58.