HYDRO COMPANY Balance Sheet December 31, 2015
Cash	$40,000		Current liabilities	$80,000
Accounts receivable (net)	80,000		10% Bonds payable	120,000
Inventory	130,000		Common Stock	200,000
Plant and equipment (net)	250,000		Retained earnings	100,000
Total assets	$500,000		Total Liabilities and Stockholders' Equity	$500,000

Sales revenues for 2015 were $800,000, gross profit was $320,000, and net income was $36,000. The income tax rate was 40 percent. One year ago, accounts receivable (net) were $76,000, inventory was $110,000, total assets were $460,000, and stockholders equity was $260,000. The bonds payable were outstanding all year and the 2015 interest expense was $12,000.

The current ratio of Hydro Company at 12/31/2015, calculated using the above data, was 3.13 and the companys working capital was $170,000. Which of the following would happen if the firm paid off $20,000 of its current liabilities on January 1, 2016?

Select one:

Both the current ratio and working capital would decrease.

The current ratio would increase, but working capital would remain the same.

Both the current ratio and working capital would increase.

The current ratio would increase, but working capital would decrease.