Question

Would your computation be different if the company reported $320,000 worth of contingent liabilities in the notes to the statements?

Answer 1

Answers to all the parts are listed below.

What is working capital?

• Working capital is defined as the difference between current assets and current liabilities.
• It is critical to estimate and compute working capital in order to allocate cash available for working capital.
• If working capital is negative, it signifies that current liabilities exceed current assets, which is a negative indicator of liquidity.

(1-a) Computation of current liabilites = $107,600.

(Go through the table given below)

(1-b)  Working capital = Current assets - Current liabilities

• Current assets = Total assets - Non-current assets = $590,00 - $350,000 = $240,000
• Current liabilities = $107,600

So, Working capital = $240,000 - $107,600 = $132,400

(2) The computation would not alter since contingent liabilities are not recorded on the balance sheet; instead, they are disclosed in the notes to financial statements.

As a result, the $300,000 in contingent liabilities has no effect on any of the preceding calculations.

Therefore, all the answers are shown.

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The correct question is given below:

Diane Corporation is preparing its year-end balance sheet. The company records show the following selected amounts at the end of the year: |Total assets |$ 590,000 |Total non current assets |350,000 |Liabilities: | |Notes payable (8%, due in 5 years) |23,000 |Accounts payable |55,000 |Income taxes payable |11,000 |Liability for withholding taxes |4,000 |Rent revenue collected in advance |9,000 |Bonds payable (due in 15 years) |105,000 |Wages payable |9,000 |Property taxes payable |5,000 |Note payable (10%, due in 6 months) |14,000 |Interest payable |600 |Common stock |180,000 Required: 1-a. What is the amount of current liabilities? 1-b. Compute working capital. 2. Would your computation be different if the company reported $300,000 worth of contingent liabilities in the notes to its financial statements?