Question

Current assets for Bush Corporation are $260,000.00 and total assets are $600,000.00. Current liabilities are $170,000.00 and total liabilities are $300,000.00. Included in the current assets are merchandise inventory and prepaid expenses of $25,000.00 and $15,000.00, respectively. What is the acid-test ratio? A. 1.56 B. 0.87

Answer 1

The acid-test ratio for the Bush Corporation, calculated by subtracting inventory and prepaid expenses from current assets and dividing by current liabilities, is approximately 1.29. This suggests there could be an error in the provided answer choices.

Step-by-step explanation:

The acid-test ratio, also known as the quick ratio, measures a company's ability to pay off its current liabilities without relying on the sale of inventory. To calculate the acid-test ratio, you subtract inventory and any prepaid expenses from the current assets and then divide by the current liabilities.

In this case, the current assets of Bush Corporation are $260,000.00, and we must subtract both the merchandise inventory of $25,000.00 and the prepaid expenses of $15,000.00. The formula is as follows:

Acid-test ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities

Acid-test ratio = ($260,000 - $25,000 - $15,000) / $170,000 = $220,000 / $170,000 ≈ 1.29

Therefore, the acid-test ratio for the Bush Corporation rounds to approximately 1.29, which is not one of the options provided, indicating that there may have been a mistake in the question or in the choices given.