Dennisport Corporation has an acid-test ratio of 2.5. It has current liabilities of $40,000 and noncurrent assets of $70,000. The corporation's current assets consist of cash, marketable securities, accounts receivable, prepaid expenses, and inventory. If Dennisport's current ratio is 3.1, its inventory and prepaid expenses must be:
A) $12,400
B) $24,000
C) $30,000
D) $40,000

Question

Quizplus · Accepted Answer

To find the inventory and prepaid expenses, we need to use the formula for the current ratio:

Current Ratio = Current Assets / Current Liabilities

We know that the current ratio is 3.1 and the current liabilities are $40,000, so we can solve for current assets:

3.1 = Current Assets / $40,000

Current Assets = 3.1 * $40,000 = $124,000

We also know that the acid-test ratio is 2.5, which means that the current assets excluding inventory and prepaid expenses are $70,000 (noncurrent assets).

Acid-Test Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities

2.5 = ($70,000 + Inventory + Prepaid Expenses) / $40,000

$100,000 = $70,000 + Inventory + Prepaid Expenses

Inventory + Prepaid Expenses = $30,000

Therefore, the inventory and prepaid expenses must be $24,000 each ($30,000 total), which is answer choice B.

Dennisport Corporation Has an Acid-Test Ratio of 2