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.
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
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