Question

The Lux Company experiences the following unrelated events and transactions during Year 1.
The company's existing current ratio is 2:1 and its quick ratio is 1.2:1.
1. Lux wrote off $5,000 of accounts receivable as uncollectible.
2. A bank notifies Lux that a customer's check for $411 is returned marked insufficient funds. The customer is bankrupt.
3. The owners of Lux Company make an additional cash investment of $7,500.
4. Inventory costing $600 is judged obsolete when a physical inventory is taken.
5. Lux declares a $5,000 cash dividend to be paid during the first week of the next reporting period.
6. Lux purchases long-term investments for $10,000.
7. Accounts payable of $9,000 are paid.
8. Lux borrows $1,200 from a bank and gives a 90-day, 6% promissory note in exchange.
9. Lux sells a vacant lot for $20,000 that had been used in its operations.
10. A three-year insurance policy is purchased for $1,500.

Required:
Separately evaluate the immediate effect of each transaction on the company's:
a. Current ratio.
b. Quick (acid-test) ratio.
c. Working capital.



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  • CreatedJanuary 22, 2015
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