Wu Limited had $350,000 of current assets and $120,000 of current liabilities before borrowing $60,000 from the bank with a 6-month note payable.What effect did the borrowing transaction have on Wu
Limited's current ratio?
A)The ratio remained unchanged.
B)The ratio decreased.
C)The ratio increased.
D)The change in the current ratio cannot be determined.

Question

Quizplus · Accepted Answer

Before the borrowing transaction, Wu Limited had a current ratio of 2.92 ($350,000 / $120,000). After borrowing $60,000, the current assets increased to $410,000 and the current liabilities increased to $180,000 ($120,000 + $60,000). Therefore, the new current ratio is 2.28 ($410,000 / $180,000), which is a decrease from the original ratio of 2.92. The correct answer is (B) the ratio decreased.

Wu Limited Had $350,000 of Current Assets and $120,000 of Current