Question

g The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $385,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 2.0

Answer 1

Answer:

$262,500

Explanation:

Current ratio = Current asset/Current liabilities

In line with the current ratio formula, to calculate the amount of short term debt increase, with the amount of current assets and current liabilities, we must add an amount such that the result 2.0

(1,312,500 + x) / (525,000 + x) = 2.0

Cross multiply

(1,312,500 + x) = 2.0 × (525,000 + x)

Open the brackets

1,312,500 + x = 1,050,000 + 2x

Collect like terms

1,312,500 - 1,050,000 = 2x - x

262,500 = x

It therefore means that the maximum that should be borrowed to buy inventory is $262,500