Question

Francis Equipment Co. closes its books regularly on December 31, but at the end of 2017 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.

1. January cash receipts recorded in the December cash book totaled \(45,640, of which \)28,000 represents cash sales, and \(17,640 represents collections on account for which cash discounts of \)360 were given.

2. January cash disbursements recorded in the December check register liquidated accounts payable of \(22,450 on which discounts of \)250 were taken.

3. The ledger has not been closed for 2017.

4. The amount shown as inventory was determined by physical count on December 31, 2017.

The company uses the periodic method of inventory.

Instructions

(a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31.

(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amounts:

	Debit	Credit
Cash	\(39,000
Accounts receivables	42,000
Inventory	67,00
Accounts payable		\)45,000
Other Current liabilities		14,200

Short answer

Working capital (A-B)	$88,800	$60,910
Current Ratio (A/B)	2.5 times	1.74 times

Step-by-step solution

Definition of Current Ratio

Financial ratio depicting liquidity through current assets and current liabilities is known as current ratio. It helps in determining the ability to pay short-term loans.

Journal Entries Required for Corrections

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2017	Sales revenue	28,000
	Cash		28,000
	(To record the adjustment of sales revenue of year 2018)
31 Dec 2017	Accounts receivables	18,000
	Discount allowed		360
	Cash		17,640
	(To record the adjustment for cash collected in 2018)
31 Dec 2017	Cash	22,200
	Discount received	250
	Account payable		22,450
	(To record the adjustment for account payable collected in year 2018)

Current ratio and Working Capital

	As per Balance Sheet	After Adjustments
Cash	$39,000	$15,560
Accounts receivables	42,000	60,000
Inventory	67,000	67,000
(A) Total current assets	$148,000	$142,560
Accounts payable	$45,000	$67,450
Other Current liabilities	14,200	14,200
(B) Total current liabilities	$59,200	$81,650
Working capital (A-B)	$88,800	$60,910
Current Ratio (A/B)	2.5 times	1.74 times