Question

A corporation began the month with $200,000 of current assets and the following ratios:

Current ratio	2.5 to 1
Acid-test ratio	1.25 to 1

Required:

Review the following transactions and indicate the effect they have on the current ratio by placing an X in the appropriate column. Treat each transaction independently. Do not recalculate the current ratio.

		Increase	Decrease	No Effect
a.	Bought $20,000 of merchandise on account; the company uses a perpetual inventory system.
b.	Sold for $10,000 cash merchandise that cost $5,000.
c.	Collected $2,500 of accounts receivable.
d.	Paid $10,000 of accounts 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 common shares that were outstanding.
g.	Paid the dividend declared in part f.
h.	Borrowed $10,000 from a bank assuming a 60-day, 10% loan.
i.	Borrowed $25,000 from a bank by taking out a 10-year mortgage on the plant.
j.	Used the $25,000 proceeds from the mortgage to buy additional machinery.

Answer 1

		Increase	Decrease	No Effect
a.	Bought $20,000 of merchandise on account; the company uses a perpetual inventory system.			X
b.	Sold for $10,000 cash merchandise that cost $5,000.	X
c.	Collected $2,500 of accounts receivable.			X
d.	Paid $10,000 of accounts payable.	X
e.	Wrote off a $1,500 bad debt against the allowance for doubtful accounts.		X
f.	Declared a $1-per-share cash dividend on the 10,000 common shares that were outstanding.		X
g.	Paid the dividend declared in part f.	X
h.	Borrowed $10,000 from a bank assuming a 60-day, 10% loan.		X
i.	Borrowed $25,000 from a bank by taking out a 10-year mortgage on the plant.	X
j.	Used the $25,000 proceeds from the mortgage to buy additional machinery.		X