Answer:
a) <u>Current Liabilities $2,780,000</u>
<u>b) Long term liabilities $2,680,000</u>
<u>c) Accounts receivable $3,620,000</u>
<u>d) Therefore Acid Test 1.8</u>
Explanation:
Step 1: Calculate the Current Liabilities
The question requires a work-back based on the information given as follows
Stockholders Equity (A) $3,900,000
Debt Equity Ration 1.4
Total debt therefore ($3,600,000 x 1.4) (B) $5,460,000
Total debt and equity therefore is (A + B ) $9,360,000
($3,900,000 + $5,460,000)
Total Equity and Debt = Total Assets
Total Assets therefore $9,360,000
Therefore Current Assets $5,560,000
(Total debt - Non Current Asset)
($9,360,000 - $3,800,000)
Less: Cash and prepaid expenses ($1,940,000)
($1,440,000 + $500,000)
Accounts receivable $3,620,000
Current Ratio therefore is 2.0 (not 20)
<u>Meaning: Current Liabilities $2,780,000</u>
(Current Assets/ Current ratio)
($5,560,000/2)
Step 2: Calculate Long term Liabilities
Total debt (from step 1) $5,460,000
less; Current Liabilities <u>$2,780,000</u>
<u>Long term liabilities $2,680,000</u>
<u></u>
Step 3: Accounts Receivable
Total Assets $9,360,000
Current Assets $5,560,000
(Total debt - Non Current Asset)
($9,360,000 - $3,800,000)
Less: Cash and prepaid expenses ($1,940,000)
($1,440,000 + $500,000)
<u>Accounts receivable $3,620,000</u>
<u></u>
Step 4: The Acid test ratio
Cash $1,440,000
Accounts Receivable <u> </u><u> </u><u>$3,620,000</u>
Quick Asset (Cash + Accounts receivable) $5,060,000
Current Liabilities $<u>2,780,000</u>
<u>Therefore Acid Test 1.8</u>
(Quick Asset / Current liabilities)
(5,060,000/2,780,000) 1.8
