Nord Company had $375000 of current assets and $150000 of current liabilities before borrowing $70000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Nord Company's current ratio?
A) The ratio remained unchanged.
B) The change in the current ratio cannot be determined.
C) The ratio decreased.
D) The ratio increased.

Question

Quizplus · Accepted Answer

Before the borrowing transaction, Nord Company's current ratio was calculated as follows:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $375000 / $150000
Current Ratio = 2.5

After borrowing $70000, the company's new current assets would be $445000 ($375000 + $70000) and its current liabilities would remain at $150000. The current ratio would then be calculated as follows:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $445000 / $150000
Current Ratio = 2.97

Therefore, the current ratio decreased from 2.5 to 2.97 after the borrowing transaction.

Nord Company Had $375000 of Current Assets and $150000 of Current