Beta Limited had a current ratio of 0.8:1 before borrowing $50,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Beta's current ratio?
A) The ratio decreased.
B) The ratio increased.
C) The ratio remained unchanged.
D) Cannot be determined.

Question

Quizplus · Accepted Answer

To calculate the effect on the current ratio, we need to calculate both the current assets and current liabilities before and after the borrowing transaction. Assuming there were no changes to current assets, the current liabilities would increase by $50,000, resulting in a new current ratio of:

Current assets / (Current liabilities + Note payable)
= Current assets / (Current liabilities + $50,000)

Since the denominator has increased, the current ratio would increase. Therefore, choice B is correct.

Beta Limited Had a Current Ratio of 0