Question

The Nelson Company has $1,512,000 in current assets and $540,000 in current liabilities. Its initial inventory level is $380,000, 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? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

Nelson's short-term debt (notes payable)

Let “X” Taken as amount of money borrowed through short-term notes payable and the same was used to purchase inventory.

Therefore, the Current Ratio = [Current Assets + Inventory] / [Current Liabilities + Short-term notes payable]

2.00 = [$1,512,000 + X] / [$540,000 + X]

2.00 x [$540,000 + X] = [$1,512,000 + X]

$1,080,000 + 2.50X = $1,512,000 + X

$1,512,000 - $1,080,000 = 2.00X – X

$432,000 = 1.00X

X = $432,000 / 1.00

X = $432,000

Therefore, the Nelson's short-term debt will be $432,000