If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank, then immediately after this transaction what is the expected impact on the current ratio?
A)Current assets decrease therefore, the current ratio increases.
B)Current liabilities decrease therefore, the current ratio decreases.
C)Current assets and current liabilities decrease by the same amount therefore, the current ratio increases.
D)Current assets decrease and current liabilities increase by the same amount therefore, the current ratio decreases.

Question

Quizplus · Accepted Answer

The transaction is an increase in a long-term asset, equipment ($60,000), an increase in a current liability, note payable ($30,000) and a decrease in a current asset, cash ($30,000). The formula for the current ratio is current assets/current liabilities. The transaction will affect the current ratio by decreasing current assets by $30,000 and increasing liabilities $30,000. This will cause the current ratio to decrease.

If the Company Purchased a $60,000 Piece of Equipment by Paying