Question

Koto Corporation began the month of June with \(300,000 of current assets, a current ratio of 2.5:1, and an acid-test ratio of 1.4:1. During the month, it completed the following transactions (the company uses a perpetual inventory system).

June 1 Sold merchandise inventory that cost \)75,000 for \(120,000 cash.

3 Collected \)88,000 cash on an account receivable.

5 Purchased \(150,000 of merchandise inventory on credit.

7 Borrowed \)100,000 cash by giving the bank a 60-day, 10% note.

10 Borrowed \(120,000 cash by signing a long-term secured note.

12 Purchased machinery for \)275,000 cash.

15 Declared a \(1 per share cash dividend on its 80,000 shares of outstanding common stock.

19 Wrote off a \)5,000 bad debt against the Allowance for Doubtful Accounts account.

22 Paid $12,000 cash to settle an account payable.

30 Paid the dividend declared on June 15.

Required Prepare a table, similar to the following, showing Plum’s (1) current ratio,

Short answer

Current liability at the beginning is calculated at $120,000, and on 30 June, the current ratio is 0.97

Step-by-step solution

Step 1:Meaning of Current Ratio

The current ratio is calculated to see if an entity will be able to pay off its current liabilities with the current assets that are readily available.

Step 2:Computation of ratios

Transactions	Current Assets ($)	Quick Assets ($)	Current Liabilities ($)	Current Ratio	Acid Test Ratio	Working Capital ($)
	A	B	C	D=A/C	E= B/C	E= A-C
Beginning	300,000	168,000	120,000	2.50	1.40	180,000
June1	120,000	120,000
June1	(75,000)
Balance	345,000	288,000	120,000	2.88	2.40	225,000
June3	88,000	88,000
June3	(88,000)	(88,000)
Balance	345,000	288,000	120,000	2.88	2.40	225,000
June5	150,000		150,000
June5
Balance	495,000	288,000	270,000	1.83	1.06	225,000
June7	100,000	100,000	100,000
June7
Balance	595,000	388,000	370,000	1.61	1.50	225,000
June 10	120,000	120,000
June 10
Balance	715,000	508,000	370,000	2.32	1.37	345,000
June12	(275,000)	(275,000)
June12
Balance	440,000	233,000	370,000	1.19	0.63	70,000
June15
June15			80,000
Balance	440,000	233,000	450,000	0.98	0.52	(10,000)
June19	0	0	0
June19
Balance	440,000	233,000	450,000	0.98	0.52	(10,000)
June 22	(12,000)		(12,000)
June 22		(12,000)
Balance	428,000	221,000	438,000	0.98	0.50	(10,000)
June30	(80,000)		(80,000)
June30		(80,000)
Balance	348,000	141,000	358,000	0.97	0.39	(10,000)

Step 3:Computation of Missing figures

Calculation of current liabilities at the beginning

$$\begin{gathered} \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{Current}\mathbf{ }\mathbf{ratio}\mathbf{=}\frac{\mathbf{Current}\mathbf{ }\mathbf{assets}}{\mathbf{Current}\mathbf{ }\mathbf{liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{2}\mathbf{.}\mathbf{5}\mathbf{=}\frac{\mathbf{\$}\mathbf{300}\mathbf{,}\mathbf{000}}{\mathbf{Current}\mathbf{ }\mathbf{liabilities}} \\ \mathbf{Current}\mathbf{ }\mathbf{liabilities}\mathbf{=}\frac{\mathbf{\$}\mathbf{300}\mathbf{,}\mathbf{000}}{\mathbf{2}\mathbf{.}\mathbf{5}} \\ \mathbf{Current}\mathbf{ }\mathbf{liabilities}\mathbf{=}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000} \end{gathered}$$

Calculation of quick assets at the beginning

$$\begin{gathered} \mathbf{Acid}\mathbf{-}\mathbf{test}\mathbf{}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Quick}\mathbf{ }\mathbf{assets}}{\mathbf{Current}\mathbf{ }\mathbf{liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{1}\mathbf{.}\mathbf{4}\mathbf{=}\frac{\mathbf{Q}\mathbf{u}\mathbf{i}\mathbf{c}\mathbf{k}\mathbf{ }\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}{\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{Quick}\mathbf{ }\mathbf{assets}\mathbf{=}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{1}\mathbf{.}\mathbf{4} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{Quick}\mathbf{ }\mathbf{assets}\mathbf{=}\mathbf{\$}\mathbf{168}\mathbf{,}\mathbf{000} \end{gathered}$$