Longwood Company Had a Current Ratio of 3:1 at the End

question 56

Essay

Longwood Company had a current ratio of 3:1 at the end of Year 1. The asset section of the company's balance sheet is provided below:
Required:
1) Compute Longwood Company's end-of-year working capital.2) Compute the company's quick (acid-test) ratio.3) The company has a debt agreement with its bank that authorizes the bank to call in its loan to the company if the company's current ratio falls below 3:1 as of the last day of any month during the term of the loan. During January Year 2, the company engaged in the three following transactions:
(a) Collected $100,000 on account;
(b) Purchased inventory on account, $50,000
(c) Paid accounts payable, $60,000
Will the company be in default after completing these transactions? Justify your answer.Round your answers to two decimal places. $$\begin{array} { | l | r | r | } \hline \text { Cash } & & \$ 100,000 \\\hline \text { Accounts receivable } & \$ 400,000 & \\\hline \text { Less allowance for uncollectible } & 50,000 & 350,000 \\ \text { Accounts } & & \\\hline \text { Inventory } & & 550,000 \\\hline \text { Prepaid expenses } & & 74,000 \\\hline \text { Property, plant, \& equipment, net } & & 926,000 \\\hline \text { Total assets } & & \$ 2,000,000 \\\hline & & \\\hline\end{array}$$

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Definitions:

Supply Equation

A mathematical expression that shows the relationship between the quantity of a good that producers are willing to sell and factors that influence this quantity, such as price.

Price Floor

A government or group-imposed price control that sets the lowest legal price a commodity can be sold at. It is used to ensure producers receive a minimum price often in agriculture.

Shortage/Surplus

Shortage occurs when demand exceeds supply, while surplus occurs when supply exceeds demand.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a given price level in a market.