Question

Question 2

The following amounts were reported by Leau Ltd. in its most recent statement of financial position:

Cash		$33,960		Accounts payable		$656,000
Accounts receivable		390,540		Wages payable		37,000
Inventory		747,120		Income tax payable		61,000
Prepaid insurance		16,980		Unearned revenue		95,000
Property, plant, and equipment (net)		1,564,800		Bank loan payable (due in 5 years)		50,000

Calculate the current ratio and quick ratio for Leau Ltd. (Round answers to 2 decimal places, e.g. 15.25.)

Current ratio
Quick ratio

Leau Ltd.’s bank loan includes covenants related to minimum current and quick ratios that the company must maintain. The covenants state that the company must maintain a current ratio of 1.35 or more, and a quick ratio of 0.58 or more. How would a $84,900 loan, which would be repayable in three years, affect your analysis? (Round answer to 2 decimal places, e.g. 15.25.)

Quick ratio

The company

wouldwould not

meet its target.

Answer 1

Current assets = Cash + Accounts receivable + Inventory + Prepaid Insurance

= 33,960 + 390,540 + 747,120 + 16,980

= $1,188,600

Current liabilities = Accounts payable + Wages payable + Income tax payable + Unearned revenue

= 656,000 + 37,000 + 61,000 + 95,000

= $849,000

Current ratio = Current assets/Current liabilities

= 1,188,600/849,000

= 1.4

Quick ratio = (Cash + Accounts receivable)/Current liabilities

= (33,960 + 390,540)/849,000

= 424,500/849,000

= 0.5

	Minimum required	Actual
Current ratio	1.35	1.4
Quick ratio	0.58	0.5

Loan of $84,900 repayable in three year would not effect Current ratio and Quick ratio.

The company would not meet its target of quick ratio

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