Questions 2 - 8 are based on the following Data:

Hydro Company

Balance Sheet

December 31, 2020

Cash $ 40,000 Current Liabilities $ 80,000

Accounts Rec. (net) 80,000 10% Bonds payable 120,000

Inventory 130,000 Common Stock 200,000

Plant & Equip. (net) 250,000 Retained earnings 100,000

Total Assets $500,000 Total Liab. and S/H/E $500,000

Sales revenues for 2020 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 2020 interest expense was $12,000.

The current ratio of Hydro Company at 12/31/2020, calculated using the above data, was 3.13 and the company's 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, 2021?

Select one:

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

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

c. Both the current ratio and working capital would decrease

d. Both the current ratio and working capital would decrease