Question

On June 30, 2018, Baird Company’s total current assets were $502,000 and its total current liabilities were $274,000. On July 1, 2018, Baird issued a long-term note to a bank for $39,400 cash. Required Compute Baird’s working capital before and after issuing the note. Compute Baird’s current ratio before and after issuing the note.

Answer 1

Answer:

Before issuing the note

Current ratio

= Current assets

   Current liabilities

= $502,000

  $274,000

= 1.83: 1

After issuing the note

Current ratio

= $538,400

  $274,000

= 1.96:1

Explanation:

Current ratio is the ratio of current assets to current liabilities. Before issuing the note, current assets amounted to $502,000 while current liabilities were $274,000. After issuing the note, current assets increased to $538,400 as a result of $39,400 received on note issue. This increases the current ratio from 1.83 to 1.96.