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

question 31

Essay

Longwood Company had a current ratio of 3:1 at the end of 2013. 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 2014, 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.

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