Response to the following problem:
A company began the month of May with $200,000 of current assets, a 2.5 to 1 current ratio, and a 1.25 to 1 acid-test ratio. During the month, it completed the following transactions:
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Effect on current ratio
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Transaction
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Increase
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Decrease
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No change
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a. Bought $20,000 of merchandize on account (the company uses a perpetual inventory system)
b. Sold for $10,000 cash, merchandize that cost $5,000
c. Collected a $2,500 account receivable
d. Paid a $10,000 account payable
e. Wrote off a $1,500 bad debt against the allowance for doubtful accounts
f. Declared a $1 per-share cash dividend on the 10,000 outstanding common shares
g. Paid the dividend declared above
h. Borrowed $10,000 from a bank by assuming a 60-day, 10-per cent loan
i. Borrowed $25,000 from a bank by placing a 10-year mortgage on the plant
j. Used the $25,000 proceeds of the mortgage to buy additional machinery.
Required:
1. Indicate the effect on current ratio assuming each transaction is independent of the others.
2. At the end of May, and taking all the above transactions into account, what was
a. The current ratio?
b. The acid-test ratio?