The Target Company Has Current Assets of $10,000 and Current

question 173

Essay

The Target Company has current assets of $10,000 and current liabilities of $8,000.They are concerned about their current ratio and are considering paying Accounts Payable totaling $3,000.The Target Company has a loan with National Bank which requires them to maintain a minimum current ratio of 1.4.
Required:
1.What is the formula for the current ratio?
2.Compute the current ratio before the possible payment of the liabilities of $3,000.
3.Compute the current ratio assuming that Target Company pays the $3,000 in current liabilities.
4.Compute the current ratio assuming that Target Company buys inventory of $3,000 on account.Ignore Requirement 3.
5.Compute the current ratio assuming that Target Company sells short-term investments with a carrying value of $3,000 for $3,000.Ignore Requirements 3 and 4.

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Definitions:

Gift Causa Mortis

A gift that is made in contemplation of one’s immediate death.

Contemplation

The action of looking thoughtfully at something for a long time or thinking about something deeply.

Probate

The judicial process in which a will is proven in a court of law to be valid or invalid, and the legal process of administering the estate of a deceased person.

Bailment Contract

An agreement where personal property is transferred from the bailor to the bailee for a specific purpose, with the expectation of return.