Baden Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Baden Company's current ratio?

Question

Quizplus · Accepted Answer

Before borrowing, the current ratio of Baden Company is 375,000/150,000 = 2.5. 
After borrowing, its current assets increase to $450,000 and its current liabilities increase to $225,000 ($150,000 + $75,000). 
The new current ratio is 450,000/225,000 = 2. 
Therefore, the borrowing transaction decreased the current ratio from 2.5 to 2.

Baden Company Had $375,000 of Current Assets and $150,000 of Current