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The current asset section of Guardian Consultant's balance sheet consists of cash, accounts receivable, and prepaid expenses
The current asset section of Guardian Consultant's balance sheet consists of cash, accounts receivable, and prepaid expenses. The 2021 balance sheet reported the following: cash, $1,380,000; prepaid expenses, $440,000; long-term assets, $3,200,000; and shareholders' equity, $3,300,000. The current ratio at the end of the year was 2.0 and the debt to equity ratio was 1.8.
Required:
Determine the following 2021 amounts and ratios: (Round your "The acid-test ratio" answer to 1 decimal place.)
Expert Solution
Given,
Current Ratio = 2.0
Total Assets = Cash + Prepaid Expenses + Accounts Receivables+ Long term Assets = $1,380,000+$440,000+ Accounts Receivables+$3,200,000
Total Assets = $5,020,000 + Accounts Receivables
Debt to Equity Ratio = 1.8
Debt to Equity Ratio = Total Debt / Total Equity
1.8 = Total Debt / $3,300,000
Total Debt = 1.8*$3,300,000
Total Debt = $5,940,000
Total Assets = Total Debt + Shareholders Equity
$5,020,000 + Accounts Receivables = $5,940,000 + $3,300,000
Accounts Receivables = $9,240,000 - $5,020,000
Accounts Receivables = $4,220,000
Total Assets = $5,020,000 + $4,220,000 = $9,240,000
Current Assets = Total Assets - Long term Assets
= $9,240,000 - $3,200,000
Current Assets = $6,040,000
Current Ratio = Current Assets/Current Liabilities
2.0 = $6,040,000/Current Liabilities
Current Liabilities = $6,040,000/2.0
Current Liabilities = $3,020,000
Total Debt = Current Liabilities + Long term Liabilities
$5,940,000 = $3,020,000 + Long term Liabilities
Long term Liabilities = $5,940,000 - $3,020,000
Long term Liabilities = $2,920,000
Acid Test Ratio = Liquid Assets/Current Liabilities
= ($1,380,000+$4,220,000)/$3,020,000
= $5,600,000/$3,020,000
Acid Test Ratio = 1.9
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