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Copyright © 2018 Pearson Education, Inc.
Explanation: D) Cash $13,000
Accounts Receivable 8,000
Prepaid Rent 7,000
Prepaid Insurance 2,100
Office Supplies 3,300
Total current assets $33,400
Accounts Payable $5,500
Salaries Payable 4,500
Interest Payable 2,000
Total current liabilities $12,000
Current ratio = Total current assets / Total current liabilities
Current ratio = $33,400 / $12,000 = 2.78
Diff: 2
LO: 4-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: How Do We Use the Current Ratio to Evaluate Business Performance? (H1)
16) Calculate the current ratio using the following information: (Round your answer to two decimal
places.)
Cash $5,000
Accounts Receivable 1,100
Prepaid Rent 1,000
Land 40,000
Equipment 4,000
Accumulated Depreciation 1,200
Accounts Payable 3,000
Salaries Payable 900
Notes Payable—long term 9,000
A) 1.82
B) 2.37
C) 3.09
D) 1.56
17) Answer the following questions regarding the current ratio:
Current Ratio Question
Answer
What does the current ratio
measure?
How is the current ratio
calculated?
When analyzing the current
ratio, what is the rule of
thumb?
What does the current ratio
measure?
How is the current ratio
calculated?
18) The following information is provided for Journey Inc. and Mastery Inc. Both corporations provide
training materials for electricians.
Current Ratio
Company
2019
Journey Inc.
1.2
Mastery Inc.
1.4
a. Which company has the stronger current ratio for 2018 and 2019? Defend your answer.
b. Discuss the change in current ratio for each company.
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19) Wilson Engraving just completed operations for the year ending December 31, 2018. Accounts from
the adjusted trial balance dated December 31, 2018 are listed in alphabetical order below:
Balance
Account Title
Debit
Credit
Accounts Payable
$15,000
Accounts Receivable
$16,000
Accumulated Depreciation –
Equipment
32,000
Cash
25,000
Common Stock
36,000
Depreciation Expense –
Equipment
10,000
Dividends
5,000
Equipment
65,000
Insurance Expense
4,000
Interest Expense
3,000
Notes Payable (due March 31,
2020)
10,000
Office Supplies
4,000
Office Supplies Expense
1,000
Prepaid Insurance
10,000
Retained Earnings December
31, 2017
6,000
Salaries Expense
15,000
Salaries Payable
5,000
Service Revenue
50,000
Unearned Revenue (short-term)
8,000
Utilities Expense
4,000
Totals
$162,000
$162,000
Requirement:
a. Prepare the closing entries. Omit explanations.
b. Prepare, in good form, the income statement, statement of retained earnings, and balance sheet.
c. Compute the current ratio. Label your work. Comment on the current ratio.
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Copyright © 2018 Pearson Education, Inc.
Answer:
a.
Date
2018
Account Title
Debit
Credit
Dec. 31
Service Revenue
50,000
Income Summary
50,000
31
Income Summary
37,000
Depreciation Expense—Equipment
10,000
Insurance Expense
4,000
Interest Expense
3,000
Office Supplies Expense
1,000
Salaries Expense
15,000
Utilities Expense
4,000
31
Income Summary
13,000
Retained Earnings
13,000
31
Retained Earnings
5,000
Dividends
5,000
b.
Wilson Engraving
Income Statement
For the Year Ended December 31, 2018
Revenues:
Service Revenue $50,000
Expenses:
Salaries Expense $15,000
Depr. Exp. – Equip. 10,000
Insurance Expense 4,000
Utilities Expense 4,000
Interest Expense 3,000
Supplies Expense 1,000
Total Expenses 37,000
Net Income 13,000
Wilson Engraving
Statement of Retained Earnings
For the Year Ended December 31, 2018
Retained Earnings, January 1, 2018 $6,000
Net Income 13,000
19,000
Dividends (5,000)
Retained Earnings, December 31, 2018 $14,000