Q14SE - Horngren'S Financial And Managerial Accounting

Question

End of the Line Montana Refrigeration has these account balances at December 31, 2018: Notes Payable, long-term \( 9,200 Accounts Payable \) 3,600 Prepaid Rent 2,500 Accounts Receivable 6,600 Salaries Payable 2,600 Cash 3,500 Service Revenue 15,600 Depreciation Expense—Equip. 400 Office Supplies 1,300 Equipment 24,000 Accumulated Depreciation—Equip. 4,000 Common Stock 6,000 Advertising Expense 900 Rent Expense 1,800 Requirements 1. Calculate End of the Line Montana Refrigeration’s current ratio. 2. How much in current assets does End of the Line Montana Refrigeration have for every dollar of current liabilities that it owes?

Step-by-Step Solution

Answer

(1) Current ratio equals to 2.24 times. 

(2) $2.24

Step 1: Calculation of Current Ratio

Current ratio is calculated as follows: 

$\begin{array}{rcl}\mathbf{CurrentRatio}& \mathbf{=}& \frac{\mathbf{PrepaidRent}+\mathbf{OfficeSupplies}+\mathbf{AccountsReceivable}+\mathbf{Cash}}{\mathbf{SalariesPayable}+\mathbf{AccountsPayable}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{500}+\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{300}+\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{600}+\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{500}}{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{600}+\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{600}}\\ & \mathbf{=}& \mathbf{2}\mathbf{.}\mathbf{24}\end{array}$

Step 2: Explanation on Current Assets Per Dollar of Current Liabilities

The current ratio is 2.24 times, which indicates that current assets are 2.24 times current liabilities. This indicates that there is $2.24 of current assets for a single dollar of current liabilities.