Paul’s Parts Ltd’s statement of financial position (extract only) on 30 June 2020 is set out below.

Required

(a) Calculate the current and quick ratios.

(b) A loan agreement entered into by the company in 2018 requires the company to maintain a minimum current ratio of 1.5:1. Management is concerned that this requirement will not be met and is considering entering into one or more of the following transactions before the end of the financial year, 30 June. Calculate the current and quick ratios after each of the following transactions and indicate whether the ratio would be increased, decreased or unaffected by the transaction.

i. Purchase $12 000 worth of inventory on credit.

ii. Pay $75 000 on payables.

iii. Give existing creditors a $60 000 bill to settle some payables.

iv. Borrow $90 000 using a long-term bank loan.

v. Give existing creditors a $60 000 long-term loan to settle some payables.

Transcribed Image Text:

PAUL'S PARTS LTD Statement of Financial Position as at 30 June 2020 CURRENT LIABILITIES Payables $180.000 125 600 Other liabilities CURRENT ASSETS Cash Receivables Inventories Prepaid expenses 270400 24 800 $600 800 $180000 208000 $388000