Cole Company had the following accounts and balances on December 31, 2015: Incom
ID: 2655246 • Letter: C
Question
Cole Company had the following accounts and balances on December 31, 2015:
Income Taxes Payable
$51,250
Cash
20,000
Notes Payable, 10%, due June 2, 2016
1,000
Accounts Receivable
267,500
Equipment
950,000
Accounts Payable
104,400
Inventory
85,000
Land
600,000
Allowance for Doubtful Accounts
12,000
Discount on Notes Payable
150
Notes Receivable, maturity 2/1/2022
5,000
Current Maturities of Long-Term Debt
6,900
Unearned Revenue
4,320
Interest Payable
1,010
Wages Payable
6,000
Marketable Securities
40,000
Capital Stock
900,000
REQUIRED:
Compute Cole’s working capital.
Compute Cole’s current ratio. What does this ratio indicate about Cole’s condition?
Income Taxes Payable
$51,250
Cash
20,000
Notes Payable, 10%, due June 2, 2016
1,000
Accounts Receivable
267,500
Equipment
950,000
Accounts Payable
104,400
Inventory
85,000
Land
600,000
Allowance for Doubtful Accounts
12,000
Discount on Notes Payable
150
Notes Receivable, maturity 2/1/2022
5,000
Current Maturities of Long-Term Debt
6,900
Unearned Revenue
4,320
Interest Payable
1,010
Wages Payable
6,000
Marketable Securities
40,000
Capital Stock
900,000
Explanation / Answer
Step1: Computation of Current Asset.We have,
Note: Allowance of doubtful account is adjusted with Account receivable.
Note2: Computation of Current Liabilities.We have,
(a) Computation of Working Capital.We have,
Working Capital = Current Asset - Current Liabilities
Working Capital = 400,500 - 174,730 =$ 225,770
Hence, working capital of the company is $ 225,770.Working capital measure the liquidity of the company. Greater working capital show higher liquidity of the company.
(b) Computaion of the Current ratio.We have,
Current Ratio = Current Asset / Current Liabilities
Current Ratio = 400,500 / 174,730 = 2.29 times
Hence, the current ratio of the company is 2.29 times.It is also measure the liquidity of the company. Higher the current ratio, higher the liquidity of the firm.
Particulars Amount ($) Cash 20,000 Account Receivable (267,500 - 12,000) 255,500 Inventory 85,000 Marketable Securities 40,000 Total Current Asset 400,500