Question

On June 30, 2018, Campbell Company’s total current assets were $500,500 and its total current liabilities were $276,500. On July 1, 2018, Campbell issued a long-term note to a bank for $41,200 cash. Required Compute Campbell’s working capital before and after issuing the note. Compute Campbell’s current ratio before and after issuing the note.

Answer 1

Answer:

(i) $224,000; $224,000

(ii) 1.81; 1.71

Explanation:

(i) Working capital

Before issue of note = Total current assets - Total current liability

                                  = $500,500 - $276,500

                                  = $224,000

After issue of note:

= [Total current assets + cash] - [Total current liability + short-term note]

= [$500,500 + $41,200] - [$276,500 + $41,200]

= $541,700 - $317,700

= $224,000

(ii) Current ratio

Before issue of note:

= Total current assets ÷ Total current liability

= $500,500 ÷ $276,500

= 1.81

After issue of note:

= [Total current assets + cash] ÷ [Total current liability + short-term note]

= [$500,500 + $41,200] ÷ [$276,500 + $41,200]

= $541,700 ÷ $317,700

= 1.71