Park Corporation began the month of May with $650,000 of current assets, a curre
ID: 2359707 • Letter: P
Question
Park Corporation began the month of May with $650,000 of current assets, a current ratio of 2.50:1, and an acid-test ratio of 1.10:1. During the month, it completed the following transactions (the company uses a perpetual inventory system). May 2 Purchased $75,000 of merchandise inventory on credit. 8 Sold merchandise inventory that cost $58,000 for $103,000 cash. 10 Collected $19,000 cash on an account receivable. 15 Paid $21,000 cash to settle an account payable. 17 Wrote off a $3,000 bad debt against the Allowance for Doubtful Accounts account. 22 Declared a $1 per share cash dividend on its 40,000 shares of outstanding common stock. 26 Paid the dividend declared on May 22. 27 Borrowed $75,000 cash by giving the bank a 30-day, 10% note. 28 Borrowed $90,000 cash by signing a long-term secured note. 29 Used the $165,000 cash proceeds from the notes to buy new machinery. Prepare a table showing Park's (10 current ratio, (2) acid-test, and (30 working capital, after each transaction, Round ratios to two decimalsExplanation / Answer
Alright well to do this problem we must work backwards to start. So, since our current assets are at $650,000, and we know that the current ratio= current assets/current liabilities we can find current liabilities by solving the equation. 2.5=650,000/X. X=260,000 which gives us our current liabilities for the month. Since the second questions asks for the acid-test we will also want to find the value of the numerator of the acid test. The acid test or (quick test for memory purposes) is a test to see the current assets that can be very quickly liquidated (not inventory or prepaid expenses) versus all our current liabilities. the acid test ratio=(cash+short-term investments+net receivables)/current liabilities. Since the ratio is 1.1 it yields that 1.1=(cash+short-term investments+net receivables)/260000, which means that cash+short-term investments+net receivables=$286,000. Working capital is current assets(650,000)-current liabilites(260,000)=390,000. Now that we have solved for the base values of the formulas that need to be found, we can begin to create the table.
The table should have a layout similar to this on excel:
Transaction Date Current Assets Cash+short-term investments+Receivables Current Liabilities
May 1, 650,000, 286,000 260,000
These should be followed by the three equations: current ratio, acid-test ratio, and working capital. The value for these ratios should be inputed as its equation. Using excel will save you a lot of time if you know how to use it. If not everything must be manual, I will show you the effects of each transaction. On May 2nd we purchased $75,000 merchandise inventory on credit. We gained a current asset in inventory for 75,000 but we increased current liabilities by 75,000 because we purchased this on credit giving us an accounts payable. Now the effects of this transaction can be shown as follows, current assets went up 75,000 there was no change to cash+STI+receivables, and current liabilities went up 75,000 the new ratios would be current ratio=(650,000+75000)/(260000+75000)=2.16. You can compute the acid test ratio and working capital using the same equations above to get a new acid test ratio of 0.85 and the working capital would stay the same at $390,000 since there was an equal increase in current assets and curret liabilities and thus 725000-335000 still equals 390,000. For the sake of saving space I will just tell you the effects of the rest of the transactions, the math is easy enough to where you can do it.
On May 8th we increased our assets by a net of $45,000 since even though we gained cash we lost the merchandise inventory 103,000-58000. So, our current assets increased by 45,000 our cash+STI+net receivable would increase by 103,000 since inventory does not affect its value. There is no change in current liabilities.
On the 10th there is no change in current assets since cash increased by the same amount as receivables decreased. Likewise, there is no change in cash+STI+net receivable and no change in current liabilities
On the 15th our current assets and cash + STI + net receivable went down by 21000 since we paid cash, and our current liabiltiies went down 21000 since we paid off our accounts payable.
on the 17th we wrote off bad debt. Now writing off bad debt is the actual elmination of your accounts receivable because you now know that the specific account is no longer collectible. To record this transaction we would credit or reduce account receivable and debit or reduce our allowance for doubtful accounts for $3000. But, since the allowance for doubtful accounts is already subtracted from receivables to find your net receivables that is part of current assets a decrease in both will have no affect on your current assets. Thus current assets, cash + STI + net receivables and current liabilities remain the same.
On the 22nd we declared a dividend, so we have a dividend liability of $40,000 and reduce retained earnings with a debit of 40,000. so current assets and Cash+... remain the same, but current liabilities increases by 40,000. Remember, retained earnings is part of stockholder's equity, not assets.
On the 26th we pay the dividend with cash. So we reduce our current assets by $40,000 and reduce our current liabilities by 40,000, since we no longer have the dividend liability.
On the 27th we borrowed $75,000 cash by giving the bank a note. So, we increase our current assets and cash+... by $75,000 and increase our current liabilities by $75,000 (the interest is recognized at a later date).
On the 28th we borrowed 90,000 cash by signing a long term note. So, increase current assets and cash+... by 90,000, but current liabilities stays the same as a long-term note payable is not a current but a long term liability.
On the 29th cash was used to buy machinery. Now our current assets and our cash+STI+receivables decreased by $165,000 since the machine is a long-term asset. Current liabilities stays the same.
Hope this helps, sorry it was so long but frankly this was a long problem. Please do not forget to rate.