Question: Belanger Ld reports a current ratio of 2 to 1

Belanger Ld. reports a current ratio of 2- to- 1 in its 20X2 financial statements. The statement of Financial position shows current assets of $ 2,540,500 and current liabilities of $ 1,284,000. Accounts receivable are $ 745,900 of the current assets. Foote is considering transferring $ 440,000 of the accounts receivable with a 90- day term to a Financial institution. There are no bad debts associated with these accounts receivable. Proceeds of $ 421,200 are expected from the transaction.

1. What criteria must be met for the transfer of accounts receivable to qualify for derecognition?
2. Prepare journal entry to record the transfer as (a) a sale/ derecognition and (b) a borrowing.
3. Recalculate the current ratio reflecting first (a) and then (b) in requirement 2. 4. Why might a financial statement analyst restore transferred accounts receivable to the statement of financial position before performing a ratio analysis? What ratios other than the current ratio would be especially affected?

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  • CreatedFebruary 17, 2015
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