Recording Current Liabilities and Calculating the Current Ratio
ABC Co. has the following balances in its accounts as of the beginning of the day on December 31 (this is not all of the accounts):
| Account |
Debit |
Credit |
|
Accounts payable
|
|
$ 100,000
|
|
Accounts receivable
|
$150,000
|
|
|
Cash
|
75,000
|
|
|
Interest payable
|
|
0
|
|
Inventory
|
270,000
|
|
|
Long-term notes payable
|
|
1,000,000
|
|
Other current assets
|
60,000
|
|
|
Other current liabilities
|
|
45,000
|
|
Sales taxes payable
|
|
10,000
|
|
Short-term notes payable
|
|
0
|
|
Unearned revenues
|
|
30,000
|
The following information is not reflected in these balances:
a. On December 31, ABC accepted delivery of $30,000 of inventory. ABC has not yet paid its suppliers.
b. On December 1, ABC bought some equipment for $200,000 with a short-term note payable bearing 12 percent interest. ABC has not made any journal entries related to this transaction.
c. Customers prepaid $10,600 related to services ABC will perform next year. This price included 6 percent sales tax.
d. $20,000 in gross salaries and wages are paid. Assume all employees are below the Social Security maximum; there is no state unemployment tax; and 1 percent federal unemployment tax, $2,000 of federal income tax, and $500 of state income tax are withheld.
Required:
1. Prepare the necessary journal entries for a-d.
2. Determine the current ratio before accounting for the additional information.
3. Determine the current ratio after accounting for the additional information.
4. Explain why ABC's current ratio deteriorated so badly.