(Answered): partment prepare a preliminary balance sheet on December 30, 2014, so that the CFO could get an idea of how the company stood. He knows tha…

Exercise 2-10

The chief financial officer (CFO) of Grienke Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2014, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows.

GRIENKE CORP.
Balance Sheet
December 30, 2014
Current assets
Cash $26,945
Accounts receivable 31,847
Prepaid insurance 6,702 $ 65,494
Equipment (net) 201,660
Total assets $267,154
Current liabilities
Accounts payable $ 21,945
Salaries and wages payable 11,847 $ 33,792
Long-term liabilities
Notes payable 81,702
  Total liabilities 115,494
Stockholders’ equity
Common stock 100,000
Retained earnings 51,660 151,660
Total liabilities and stockholders’ equity $267,154
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Calculate the current ratio and working capital based on the preliminary balance sheet. (Round Current Ratio to 1 decimal place, e.g. 0.7 : 1)

Current ratio Entry field with incorrect answer :1
Working capital $ Entry field with incorrect answer
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Based on the results in (a), the CFO requested that $21,945 of cash be used to pay off the balance of the accounts payable account on December 31, 2014. Calculate the new current ratio and working capital after the company takes these actions. (Round Current Ratio to 1 decimal place, e.g. 0.7 : 1)

Current ratio Entry field with incorrect answer :1
Working capital $ Entry field with incorrect answer
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Expert Answer

 

1.   Current ratio = Total current assets / Total current liabilities

= [cash $26,945 + Accounts receivable 31,847 + prepaid insurance 6,702 ] / [ Accounts payable $21,945 + Salaries and wages payable 11,847]

= $65,494 / $33,792

= 1.9 : 1

Working capital = Total current assets – Total current liabilities

= $65,494 – $33,792

= $31702

2. CFO requested that $21,945 of cash be used to pay off the balance of the accounts payable account on December 31, 2014 ;

   Current ratio = Total current assets / Total current liabilities

= [cash ($26,945 – $21945 ) + Accounts receivable 31,847 + prepaid insurance 6,702 ] / [ Accounts payable ($21,945 – $21945) + Salaries and wages payable 11,847]

= [cash $5000 + Accounts receivable 31,847 + prepaid insurance 6,702 ] / [ Accounts payable $0 + Salaries and wages payable 11,847]

= 43549 / 11847

= 3.7 : 1

Working capital = Total current assets – Total current liabilities

= 43549 – 11847

= $31702

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