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:
$$\begin{array} { | l | r | r | } \hline \text { Cash } & & \$ 100,000 \\\hline \text { Accounts receivable } & \$ 400,000 & \\\hline \text { Less allowance for uncollectible } & 50,000 & 350,000 \\ \text { Accounts } & & \\\hline \text { Inventory } & & 550,000 \\\hline \text { Prepaid expenses } & & 74,000 \\\hline \text { Property, plant, \& equipment, net } & & 926,000 \\\hline \quad \text { Total assets } & & \$ 2,000,000 \\\hline & & \\\hline\end{array}$$ Required:
1)Compute Longwood Company's end-of-year working capital.
2)Compute the company's quick (acid-test)ratio.
3)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:
(a)Collected $100,000 on account
(b)Purchased inventory on account,$50,000
(c)Paid accounts payable,$60,000
Will the company be in default after completing these transactions? Justify your answer.
(Round your answers to two decimal places.)