Longwood Company Had a Current Ratio of 3:1 at the End

Essay

Longwood Company had a current ratio of 3:1 at the end of Year 1. The asset section of the company's balance sheet is provided below:
$\begin{array}{llr} \text {Cash } &&100,000\\ \text {Accounts receivable } &\$400,000\\ \text { Less allowance for uncollectible Accounts } &\underline{50,000}&350,000\\ \text { Inventory} &&550,000\\ \text { Prepaid expenses } &&74,000\\ \text { Property, plant, \& equipment, net} &&\underline{926,000}\\ \text { Total assets} &&\underline{\$2,000,000}\\\end{array}$
Required: Compute Longwood Company's end-of-year working capital.Compute the company's quick (acid-test) ratio.The company has a debt agreement with its bank that authorizes the bank to call in its loan to the company if the company's current ratio falls below 3:1 as of the last day of any month during the term of the loan. During January Year 2, the company engaged in the three following transactions:Collected $100,000 on accountPurchased inventory on account, $50,000Paid accounts payable, $60,000
Will the company be in default after completing these transactions? Justify your answer.
(Round your answers to two decimal places.)