The bond indenture for the 10-year, 9 1–% debenture bonds dated January 2, 2007, required work ing capital of $350,000, a current ratio of 1.5, and a quick ratio of 1 at the end of each calendaryear until the bonds mature. At December 31, 2008, the three measures were computed asfollows: 1.Current assets:Cash $275,000 Marketable securities123,000 Accounts and notes receivable (net)172,000 Inventories295,000 Prepaid expenses35,000 GoodwillTotal current assets 150,000 $1,050,000 Current liabilities:Accounts and short-term notes payable $375,000 Accrued liabilitiesTotal current liabilities 250,000 625,000 Working capital $ 425,000 2. Current ratio = 1.68 ($1,050,000 ÷ $625,000) 3. Quick ratio = 1.52 ($570,000 ÷ $375,000)a. List the errors in the determination of the three measures of current position analysis.b. Is the company satisfying the terms of the bond indenture?

Solution Formula used Working capital =current assets – current liabilities Current…

Answered: 2. Current ratio = 1.68…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The bond indenture for the 10-year, 9 1–% debenture bonds dated January 2, 2007, required work ing capital of $350,000, a current ratio of 1.5, and a quick ratio of 1 at the end of each calendar

year until the bonds mature. At December 31, 2008, the three measures were computed as

follows:

1.	Current assets: Cash	$275,000
	Marketable securities	123,000
	Accounts and notes receivable (net)	172,000
	Inventories	295,000
	Prepaid expenses	35,000
	Goodwill Total current assets	150,000	$1,050,000
	Current liabilities: Accounts and short-term notes payable	$375,000
	Accrued liabilities Total current liabilities	250,000	625,000
	Working capital		$ 425,000

2. Current ratio = 1.68 ($1,050,000 ÷ $625,000)

3. Quick ratio = 1.52 ($570,000 ÷ $375,000)

a. List the errors in the determination of the three measures of current position analysis.

b. Is the company satisfying the terms of the bond indenture?

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