Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests $80,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what would be its current ratio?
A)2.94
B)3.24
C)2.06
D)0.83

Question

Quizplus · Accepted Answer

First, let's calculate Jake's current assets and current liabilities after the loan:

Current assets = $120,000 + $20,000 (funds kept as cash) = $140,000

Current liabilities = $68,000 + $100,000 (loan) = $168,000

Current ratio = Current assets / Current liabilities = $140,000 / $168,000 = 0.8333 ≈ 2.06 (rounded to two decimal places)

Therefore, the current ratio would be 2.06.

Jake Company Borrowed $100,000 from Guaranty Trust Bank to Finance