Response to the following problem:
The bond indenture for the 10-year, 91 -2% debenture bonds dated January 2, 2007, required working capital of $350,000, a current ratio of 1.5, and a quick ratio of 1 at the end of each calendar year until the bonds mature. At December 31, 2008, the three measures were computed as follows:
1. Current assets:
Cash $275,000
Marketable securities 123,000
Accounts and notes receivable (net) 172,000
Inventories 295,000
Prepaid expenses 35,000
Goodwill 150,000
Total current assets $1,050,000
Current liabilities:
Accounts and short-term notes payable $375,000
Accrued liabilities 250,000
Total current liabilities 625,000
Working capital $ 425,000
2. Current ratio = 1.68 ($1,050,000 ÷ $625,000)
3. Quick ratio = 1.52 ($570,000 ÷ $375,000)
a. List the errors in the determination of the three measures of current position analysis.
b. Is the company satisfying the terms of the bond indenture?