Keener Incorporated had the following transactions occur involving current assets and current liabilities during February 2017.
Feb. 3 Accounts receivable of $14,000 are collected.
7 Equipment is purchased for $27,800 cash.
11 Paid $2,300 for a 3-year insurance policy.
14 Accounts payable of $12,500 are paid.
18 Cash dividends of $5,700 are declared.
Additional information:
1. As of February 1, 2017, current assets were $130,200, and current liabilities were $49,300.
2. As of February 1, 2017, current assets included $15,900 of inventory and $1,000 of prepaid expenses.
(a) Compute the current ratio as of the beginning of the month and after each transaction.
(b) Compute the acid-test ratio as of the beginning of the month and after each transaction
Round answers to 1 decimal place, e. g. 1.6.)
Current ratio Acid-test ratio
February 1 :1 :1
February 3 :1 :1
February 7 :1 :1
February 11 :1 :1
February 14 :1 :1
February 18 :1 :1

Please refer to Explanation

Explanation:

The Current Ratio is calculated by dividing the Current Assets by the Current Liabilities.

The Acid-Test Ratio on the other hand is calculated by removing the Inventory from the Current Assets and then dividing that figure by the Current Liabilities.

February 1.

Current Ratio = Current Assets/Current Liabilities

= 130,200/49,300

= 2.65

Acid-Test Ratio = (Current Asset – Inventory) / Current Liability

= (130,200-15,900) / 49,300

= 2.32

February 3

Accounts Receivables collected is Cash moving from The Receivables to the Cash account. Both of them are Current Assets so no change.

Current Ratio = 2.65

Acid -Test Ratio = 2.65

February 7

Cash reduces by $27,800

Current Ratio = (130,200-27,800) / 49,300

= 2.08

Acid-Test Ratio = (130,200-27,800 - 15,900) / 49,300

= 1.75

February 11

Paying for the Insurance in advance is considered a Prepayment. Prepayments are Current Assets so cash simply moved from cash account to Prepayment so no change in Current Assets so both ratios remain the same.

Current Ratio = 2.08

Acid-test Ratio = 1.75

February 14.

Accounts Payable being paid reduces the Current Liabilities. It also reduces the cash account so both Current Liabilities and Current Assets will be reduced.

Current Ratio = (130,200-27,800-12,500) / (49,300-12,500)

= 89,900 / 36,800

= 2.44

Acid-Test Ratio = (130,200 - 27,800 - 15,900 - 12,500) / (49,300-12,500)

= 74,000/36,800

= 2.01

February 18

When Dividends are declared but not paid, there is no effect on the cash account. However, because they have been declared, they become a liability. This therefore increases the current Liability account.

Current Ratio = 89,900 / (36,800 + 5,700)

= 2.12

Acid Test Ratio = 74,000 / (36,800 + 5,700)

= 1.74

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