Chapter 1, Problem 38E

Exercise 1-38 Identifying Current Assets and Liabilities

Dunn Sporting Goods sells athletic clothing and footwear 10 retail customers. Dunn’s accountant indicates that the firm’s operating cycle averages 6 months. At December 31, 2019, Dunn has the following assets and liabilities:

1. Prepaid rent in the amount of 58,500. Dunn’s rent is $500 per month.
2. A $9,700 account payable due in 45 days.
3. Inventory in the amount of $46,230. Dunn expects to sell $38,000 of the inventory within 3 months. The remainder will be placed in storage until September 2020. The items placed in storage should be sold by November 2020.
4. An investment in marketable securities in the amount of $1,900. Dunn expects to sell $700 of the marketable securities in 6 months. The remainder are not expected to be sold until 2022.
5. Cash in the amount of $1,050.
6. An equipment loan in the amount of $60,000 due in March 2024. Interest of $4,500 is due in March 2020 ($3,750 of the interest relates to 2019. with the remainder relating to the first 3 months of 2020).
7. An account receivable from a local university in the amount of $2,850. The university has promised to pay the full amount in 3 months.
8. Store equipment at a cost of $9,200. Accumulated depreciation has been recorded on the store equipment in the amount of 51,250.

Required:

1. Prepare the current asset and current liability portions of Dunn’s December 31, 20191 balance-sheet.
2. Compute Dunn’s working capital and current ratio at December 31, 2019.
3. CONCEPTUAL CONNECTION As in investor or creditor. what do these ratios tell you about Dunn’s liquidity?

To determine

Concept Introduction:

Balance Sheet: The Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.

Income Statement:

Income Statement is the part of the financial statement which is prepared to calculate the net income earned by the organization. In the income statement, all expenses are subtracted from the revenues to calculate the net income. It is prepared for a particular period.

Requirement-1:

To Prepare:

The Current assets and Current Liabilities section of the balance sheet.

Answer to Problem 38E

The Current assets and Current Liabilities section of the balance sheet is as follows:

Dunn Sporting Goods
Current Assets:
Cash	$ 1,050
Prepaid Rent	$ 8,500
Accounts Receivable	$ 2,850
Marketable securities	$ 700
Inventory	$ 38,000
Total Current Assets		$ 51,100
Current Liabilities:
Account Payable	$ 9,700
Interest Payable	$ 3,750
Total Current Liabilities		$ 13,450

Explanation of Solution

Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities. The Current assets and Current Liabilities section of the balance sheet is prepared as follows:

Dunn Sporting Goods
Current Assets:
Cash	$ 1,050
Prepaid Rent	$ 8,500
Accounts Receivable	$ 2,850
Marketable securities	$ 700
Inventory	$ 38,000
Total Current Assets		$ 51,100
Current Liabilities:
Account Payable	$ 9,700
Interest Payable	$ 3,750
Total Current Liabilities		$ 13,450

To determine

Concept Introduction:

Balance Sheet: The Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.

Income Statement:

Income Statement is the part of the financial statement which is prepared to calculate the net income earned by the organization. In the income statement, all expenses are subtracted from the revenues to calculate the net income. It is prepared for a particular period.

Requirement-2:

To Calculate:

The working capital and current ration as on Dec. 31, 2019.

Answer to Problem 38E

The working capital and current ration as on Dec. 31, 2019 is as follows:

Working Capital	$ 37,650
Current Ratio	3.80

Explanation of Solution

The working capital and current ration as on Dec. 31, 2019 is calculated as follows:

Total Current Assets (A)	$ 51,100
Total Current Liabilities (B)	$ 13,450
Working Capital (A-B)	$ 37,650
Current Ratio (A/B)	3.80

To determine

Concept Introduction:

Balance Sheet: The Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.

Income Statement:

Income Statement is the part of the financial statement which is prepared to calculate the net income earned by the organization. In the income statement, all expenses are subtracted from the revenues to calculate the net income. It is prepared for a particular period.

Requirement-3:

To Discuss:

The liquidity of the company.

Answer to Problem 38E

The firm is more liquid because its current ratio is higher than 2.

Explanation of Solution

The working capital and current ration as on Dec. 31, 2019 is calculated as follows:

Total Current Assets (A)	$ 51,100
Total Current Liabilities (B)	$ 13,450
Working Capital (A-B)	$ 37,650
Current Ratio (A/B)	3.80

The firm is more liquid because its current ratio is higher than 2.