Question

On June 30, Year 3, Zachary Company’s total current assets were $503,000 and its total current liabilities were $277,000. On July 1, Year 3, Zachary issued a short-term note to a bank for $40,200 cash. Required a. Compute Zachary’s working capital before and after issuing the note. b. Compute Zachary’s current ratio before and after issuing the note. (Round your answers to 2 decimal places.)

Answer 1

Working capital before and after issuing the note is $226,000

Current ratio before note issued is 1.82 times while it is 1.71 times after the note was issued.

Step-by-step explanation:

Working capital is the net of current asset and current liabilities. it is a financial measure that gives insight into how liquid a company is. While the current ration is the ratio of the current assets to the current liabilities. It is a financial ratio that shows how many times over the current asset can be used to settle current liabilities.

working capital before issuing note

= $503,000 - $277,000

= $226,000

working capital after issuing note

= $503,000 + $40,200 - $277,000 - $40,200

= $226,000

No change as the note issued creates a short term asset (cash) and a current liability.

Current ratio before issuing note

= $503,000/$277,000

= 1.82 times

Current ratio after issuing note

= ($503,000 + $40,200)/($277,000 + $40,200)

= 1.71 times