Before adjusting its current investments in equity securities, Caldwell Company has total current assets and current liabilities of $45,000 and $15,000, respectively. During the current year, Caldwell has net income of $243,750 with 75,000 shares of common stock outstanding. This amount excludes the effects of yearend adjustments related to the investments. Included in current assets are equity securities recorded at their original cost of $13,000. However, the current market value of those securities is $4,000 at yearend. If Caldwell properly accounts for equity securities, what is Caldwell's current ratio before and after the investment adjustment?

Question

Quizplus · Accepted Answer

Current ratio = Current assets / Current liabilities

Before investment adjustment:
Current assets = $45,000
Current liabilities = $15,000
Current ratio = $45,000 / $15,000 = 3.0

After investment adjustment:
Current assets = $45,000 - $13,000 + $4,000 = $36,000
Current liabilities = $15,000
Current ratio = $36,000 / $15,000 = 2.4

Therefore, the current ratio before the investment adjustment is 3.0 and after the investment adjustment is 2.4, so the correct answer is (D) 3.0 and 2.4.

Before Adjusting Its Current Investments in Equity Securities, Caldwell Company