Question

The current asset section of Guardian Consultant's balance sheet consists of cash, accounts recelvable, and prepald expenses. The 2018 balance sheet reported the following: cash, $1,440,000; prepald expenses, $500,000; noncurrent assets, $3,800,000; and shareholders' equity. $3,900,000. The current ratio at the end of the year was 20 and the debt to equity ratio was 1.4.
Required:

Determine the following 2018 amounts and ratios: (Round your "The acid-test ratio" answer to 1 decimal place.)

1. Current liabilities

2. Long-term liabilities

3. Accounts receivable

4. The acid-test ratio

Answer 1

Answer:

a) Current Liabilities                             $2,780,000

b) Long term liabilities                                           $2,680,000

c) Accounts receivable                                          $3,620,000

d) Therefore Acid Test                                                1.8

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)

Meaning: Current Liabilities                             $2,780,000

(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                                       $2,780,000

Long term liabilities                                           $2,680,000

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)

Accounts receivable                                          $3,620,000

Step 4: The Acid test ratio                          

Cash                                                                    $1,440,000

Accounts Receivable                                         $3,620,000

Quick Asset (Cash + Accounts receivable)       $5,060,000

Current Liabilities                                                $2,780,000      

Therefore Acid Test                                                1.8

(Quick Asset / Current liabilities)

(5,060,000/2,780,000)                                          1.8