Gil Corporation has current assets of $90,000 and current liabilities of $180,000.Required:Compute the effect of each of the following independent transactions on Gil's current ratio:1. Refinancing a $30,000 long-term mortgage with a short-term note.2. Purchasing $50,000 of merchandise inventory with short-term accounts payable.3. Paying $20,000 of short-term accounts payable. 4. Collecting $10,000 of short-term accounts receivable.

Question
Asked Oct 8, 2019
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Gil Corporation has current assets of $90,000 and current liabilities of $180,000.

Required:

Compute the effect of each of the following independent transactions on Gil's current ratio:

1. Refinancing a $30,000 long-term mortgage with a short-term note.

2. Purchasing $50,000 of merchandise inventory with short-term accounts payable.

3. Paying $20,000 of short-term accounts payable. 

4. Collecting $10,000 of short-term accounts receivable.

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Expert Answer

Step 1

Compute the effect of each of the given independent transactions on Gil's current ratio:

  1. The refinancing of a $30,000 long-term mortgage with a short-term note would increase the current liabilities of the company, and would decrease the current ratio to 0.43.
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$140,000 $230,000

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Step 2

2. The purchase of inventory with a short-term account payable would increase the current assets of the company to $140,000 ($90,000+$50,000), and would increase the current liabilities to $230,000 ($180,000+$50,000), as a result the current ratio will be 0.61.

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$140,000 $230,000

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Step 3

3. The payment made for short-term accounts payable would decrease both the current a...

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$70,000 $160,000

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