Question 11:
Current Liabilities of a company were `1,75,000 and its Current Ratio was 2: 1. It paid
`30,000 to a Creditor. Calculate Current Ratio after
payment.
Answer:
Current Ratio= 2:1 before payment to Creditor
Current Liabilities = `1,75,000 before
payment to Creditor
Current Assets = (`1,75,000×2)=3,50,000 before payment to Creditor
Current Ratio After payment to Creditor
=3,50,000-30,000/1,75,000-30,000
Current Ratio = 3,20,000/1,45,000
Current Ratio = 2.21/1
Question
12:
Ratio of Current Assets (`3,00,000) to Current Liabilities ( `2,00,000) is 1.5:1. The accountant of the firm is interested in maintaining a Current Ratio of 2:1 by paying off a part of the Current Liabilities. Compute amount of the Current Liabilities that should be paid so that the Current Ratio at the level of 2:1 may be maintained.
Answer:
Current ratio= Current assets/Current liabilities=1.5:1
The company is interested in maintaining the Current Ratio of 2:1 by paying off the liability.
Let the liability paid-off by the company = x
∴ New Current Assets = 3,00,000 − x
New Current Liabilities = 2,00,000 − x
New Current ratio= 3,00,000-x/2,00,000-x=2:1
Or 3,00,000-3x=4,00,000-2x
Or 1,00,000
Therefore, liability of `1,00,000 need to be paid-off by the company in order to maintain the Current Ratio of 2 : 1.
Question 13:
Ratio of Current Assets ( `8,75,000) to Current
Liabilities ( `3,50,000) is 2.5:1. The
firm wants to maintain Current Ratio of 2:1 by purchasing goods on credit.
Compute amount of goods that should be purchased on credit.
Answer:
Current
Assets = ` 8,75,000
Current Liabilities = ` 3,50,000
Current Ratio = 2.5:1
The business is interested to maintain its Current Ratio at 2:1 by purchasing
goods on credit.
Let the amount of goods purchased on credit be ‘x’
Current Liabilities = ` 3,50,000 + x
Current Assets = ` 8,75,000 + x
Current ratio= Current assets/Current
liabilities=8,75,,000+x/3,50,000+x=2/1
8,75,000 + x = 7,00,000 + 2x
8,75,000 – 7,00,000 = 2x – x
1,75,000 = x
Therefore, goods worth ` 1,75,000 must be purchased on credit to maintain the
current ratio at 2:1.
Question
14:
A firm had Current Assets of `5,00,000. It paid Current Liabilities of `1,00,000 and the Current Ratio became 2:1. Determine Current Liabilities and Working Capital before and after the payment was made.
Answer:
Firm
disposed off liabilities of `
1,00,000 which results in decrease in current liabilities and current assets by
the same amount.
After disposing liabilities:
Current Assets = ` 4,00,000 ( ` 5,00,000 – ` 1,00,000)
And, Let Current Liabilities be (x – ` 1,00,000)
Current ratio= Current assets/Current liabilities=4,00,000/x-1,00,000=2:1
4,00,000 = 2x – 2,00,000
6,00,000 = 2x
Therefore, x = 3,00,000
Current Liabilities after payment = x – ` 1,00,000 = ` 2,00,000
Working Capital after Payment = Current Assets – Current Liabilities
= ` 4,00,000 – ` 2,00,000 = ` 2,00,000
Current Assets before payment = ` 5,00,000
Current Liabilities before Payment = ` 3,00,000
Therefore, Working Capital Before Payment = Current Assets – Current
Liabilities
= ` 5,00,000 – ` 3,00,000 = ` 2,00,000
Question
15:
State giving reason, whether the Current Ratio will improve
or decline or will have no effect in each of the following transactions if
Current Ratio is 2:1:
(a) Cash paid to Trade Payables.
(b) Bills Payable discharged.
(c) Bills Receivable endorsed to a creditor.
(d) Payment of final Dividend already declared.
(e) Purchase of Stock-in-Trade on credit.
(f) Bills Receivable endorsed to a Creditor dishonoured.
(g) Purchases of Stock-in-Trade for cash.
(h) Sale of Fixed Assets (Book Value of `50,000) for `45,000.
(i) Sale of Fixed Assets (Book Value of `50,000)
for `60,000.
Answer:
Let’s
assume Current Assets as ` 2,00,000 and Current
Liabilities as ` 1,00,000
Current Ratio=Current Assets/Current Liabilities
Current Ratio=2,00,000/1,00,000=2:1
(a) Cash paid to Trade Payables (say ` 50,000)
Current Ratio =2,00,000−50,000/1,00,000−50,000=3:1 (Improve)
(b) Bills Payable discharged (say ` 50,000)
Current Ratio = 2,00,000−50,000/1,00,000−50,000=3:1 (Improve)
(c) Bills Receivable endorsed to a creditor (say ` 50,000)
Current Ratio =2,00,000−50,000/1,00,000−50,000=3:1 (Improve)
(d) Payment of final Dividend already declared (say ` 50,000)
Current Ratio =2,00,000−50,000/1,00,000−50,000=3:1 (Improve)
(e) Purchase of Stock-in-Trade on credit (say ` 50,000)
Current Ratio =2,00,000+50,000/1,00,000+50,000=1.67:1 (Decline)
(f) Bills Receivable endorsed to a Creditor dishonoured
(say ` 50,000)
Current Ratio =2,00,000+50,000/1,00,000+50,000=1.67:1 (Decline)
(g) Purchase of Stock-in-Trade for cash (say ` 50,000)
Current Ratio =2,00,000+50,000−50,000/1,00,000=2:1 (No effect)
(h) Sale of Fixed Assets (Book value of ` 50,000) for ` 45,000
Current Ratio=2,00,000+45,000/1,00,000=2.45:1 (Improve)
(i) Sale of Fixed Assets (Book value of ` 50,000) for ` 60,000
Current Ratio =2,00,000+60,000/1,00,000=2.6:1 (Improve)
Class : 12th | Ts Grewal solution 2022-2023
Volume 3 | Chapter 4: Accounting Ratio
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