Martin Company Has Current Assets of $10,000 and Current Liabilities

Essay

Martin Company has current assets of $10,000 and current liabilities of $8,000. Its management is concerned about the current ratio and is considering paying Accounts Payable totaling $3,000. Martin Company has a loan with National Bank which requires Martin to maintain a minimum current ratio of 1.4.
Required:
1. What is the formula for the current ratio?
2. Compute the current ratio before the possible payment of the liabilities of $3,000.
3. Compute the current ratio assuming that Martin Company pays the $3,000 in current liabilities.
4. Compute the current ratio assuming that Martin Company buys inventory of $3,000 on account. Ignore Requirement 3.
5. Compute the current ratio assuming that Martin Company sells short-term investments with a carrying value of $3,000 for $3,000. Ignore Requirements 3 and 4.