Question

Plum Corporation began the month of May with $1,400,000 of current assets, a current ratio of 1.90:1, and an acid-test ratio of 1.70:1. During the month, it completed the following transactions (the company uses a perpetual inventory system).
May 2 Purchased $75,000 of merchandise inventory on credit.
8 Sold merchandise inventory that cost $55,000 for $150,000 cash.
10 Collected $26,000 cash on an account receivable.
15 Paid $29,500 cash to settle an account payable.
17 Wrote off a $5,000 bad debt against the Allowance for Doubtful Accounts account.
22 Declared a $1 per share cash dividend on its 69,000 shares of outstanding common stock.
26 Paid the dividend declared on May 22.
27 Borrowed $120,000 cash by giving the bank a 30-day, 10% note.
28 Borrowed $135,000 cash by signing a long-term secured note.
29 Used the $255,000 cash proceeds from the notes to buy new machinery.

Required
Prepare a table showing Plum's (1) current ratio, (2) acid-test ratio, and (3) working capital, after each transaction. Round ratios to two decimals.

Answer 1

Full Question attached

Answer and Explanation:

Find attached

Answer 2

Answer:

Plum Corporation

(1) current ratio = Current assets/current liabilities

(2) acid-test ratio = (Current asset -Inventory)/Current liabilities

(3) working capital = Current assets minus Current liabilities

(4) acid-test assets = quick assets

May 2 Purchased $75,000 of merchandise inventory on credit.

Current Assets:   $1,400,000 + $75,000 = $1,475,000

Current Liabilities: $737,000 + $75,000 = $812,000

Inventory: $147,000 +$75,000 = $222,000

(1) current ratio = $1,475,000/$812,000

= 1.82:1

(2) acid-test ratio = $1,475,000 - $222,000/$812,000

= 1.54:1

(3) working capital = Current Assets - Current Liabilities

= $1,475,000 - $812,000

= $663,000

May 8 Sold merchandise inventory that cost $55,000 for $150,000 cash.

Current Assets: $1,475,000 -55,000 + 150,000 = $1,570,000

Current Liabilities: $812,000

Inventory: $222,000 - 55,000 = $167,000

Quick Assets = $1,570,000 - 167,000 = $1,403,000

(1) current ratio = $1,570,000/$812,000

= 1.93

(2) acid-test ratio = $1,403,000/$812,000

= 1.73

(3) working capital = $1,570,000 - $812,000

= $758,000

May 10 Collected $26,000 cash on an account receivable.

Current Assets: $1,570,000 ($26,000 - $26,000) = $1,570,000

Current Liabilities: $812,000

Inventory: 167,000

Quick Assets = $1,570,000 - 167,000 = $1,403,000

(1) current ratio = $1,570,000/$812,000

= 1.93

(2) acid-test ratio = $1,403,000/$812,000

= 1.73

(3) working capital = $1,570,000 - $812,000

= $758,000

May 15 Paid $29,500 cash to settle an account payable.

Current Assets: $1,570,000 - $29,500 = $1,540,500

Current Liabilities: $812,000 - $29,500 = $782,500

Inventory: 167,000

Quick Assets = $1,540,500 - 167,000 = $1,373,500

(1) current ratio = $1,540,500/$782,500

= 1.97:1

(2) acid-test ratio = $1,373,500/$782,500

= 1.76:1

(3) working capital = $1,540,500 - $782,500

= $758,000

May 17 Wrote off a $5,000 bad debt against the Allowance for Doubtful Accounts account.

Current Assets: $1,540,500 - $5,000 = $1,535,500

Current Liabilities: $782,500

Inventory: 167,000

Quick Assets = $1,535,500 - 167,000 = $1,368,500

(1) current ratio = $1,535,500/$782,500

= 1.96:1

(2) acid-test ratio = $1,535,500/$782,500

= $1.96:1

(3) working capital = $1,535,500 - $782,500

=$753,000

May 22 Declared a $1 per share cash dividend on its 69,000 shares of outstanding common stock.

Current Assets: $1,535,500

Current Liabilities: $782,500

Inventory: 167,000

Quick Assets = $1,535,500 - 167,000 = $1,368,500

(1) current ratio = $1,535,500/$782,500

= 1.96:1

(2) acid-test ratio = $1,535,500/$782,500

= $1.96:1

(3) working capital = $1,535,500 - $782,500

=$753,000

May 26 Paid the dividend declared on May 22.

Current Assets: $1,535,500 -$69,000 = $1,466,500

Current Liabilities: $782,500

Inventory: 167,000

Quick Assets = $1,466,500 - 167,000 = $1,299,500

(1) current ratio = $1,466,500/$782,500

= 1.87:1

(2) acid-test ratio = $1,299,500/$782,500

= 1.66:1

(3) working capital = $1,466,500 - $782,500

= $684,000

May 27 Borrowed $120,000 cash by giving the bank a 30-day, 10% note.

Current Assets: $1,466,500 + $120,000 = $1,586,500

Current Liabilities: $782,500 + $120,000 = $902,500

Inventory: 167,000

Quick Assets = $1,586,500 - 167,000 = $1,419,500

(1) current ratio = $1,586,500/$902,500

= 1.76

(2) acid-test ratio = $1,419,500/$902,500

= 1.57

(3) working capital = $1,586,500 - $902,500

= $684,000

May 28 Borrowed $135,000 cash by signing a long-term secured note.

Current Assets: $1,586,500 + $135,000= $1,721,500

Current Liabilities: $902,500

Inventory: 167,000

Quick Assets = $1,721,500 - 167,000 = $1,554,500

(1) current ratio = $1,721,500/$902,500

= 1.91:1

(2) acid-test ratio = $1,554,500/$902,500

= 1.72

(3) working capital = $1,721,500 - $902,500

= $819,000

May 29 Used the $255,000 cash proceeds from the notes to buy new machinery.

Current Assets:  $1,721,500 - $255,000 = $1,466,500

Current Liabilities: $902,500

Inventory: 167,000

Quick Assets = $1,466,500 - 167,000 = $1,299,500

(1) current ratio = $1,466,500/$902,500

= 1.62:1

(2) acid-test ratio = $1,299,500/$902,500

= 1.44:1

(3) working capital = $1,466,500 - $902,500

= $564,000

Explanation:

a) Data and Calculations:

May 1, Current Assets = $1,400,000

Ratio of current assets to current liabilities = 1.90:1

Acid -test ratio = 1.70:1

Therefore, current liabilities = $1,400,000/1.9 = $737,000

Current Assets minus Inventory/$737,000 = 1.7

Therefore, current assets minus inventory = $737,000 * 1.7 = 1,253,000

Inventory = Current Assets - (Current assets -inventory)

= $1,400,000 - $1,253,000

= $147,000