Amount of current liabilities must be paid??

The company needs to pay off $100,000.00 of liabilities to have a current ratio of2.0. Option C is the answer.

$300,000 CA /$200,000 CL =1.5

$200,000 CA / $100,000.00 CL =2.0

Amount of current liabilities must be paid?? C.$100,000

Ans: (C) by paying off $100,000

C. $100,000

 

This will give current assets $200,000 to current liabilities $100,000

the company will pay 100,000 remains 100,000 liabilities to 

B $50,000 for maintaining a current ratio of2:1.

Answe B - $50000.

Company will have to pay liability of $50,000 to maintain the ratio of2:1.

$300000/$1,50,000 =2:1

1)1.5=300/200

2)2 =300/(200-x)

3)400-2x=300>>>>>>2x=300-400

4)2x=-100>>>> x=50>>> new ratio  2=300/(200-50)

5) to be paid is $50k

to maintain a current ratio of2:1 the company must pay $150000 as current libilities

C : 100,000

Resoning for laymen:

This is because cash/ bank is in current assets category. So if you pay off current liabilites by B. 50,000 to 150,000, the current assets also reduce to 250,000 thereby giving a ratio of only 1.66

Only by paying 100,000 you reduce current assets to 200,000 and current liabilites to 100,000 resulting in a current ratio of 2.0

Choice C is the answer for this question. Justification: Given current assets =300,000 current liabilities =200,000 current ratio =1.5 Note that, the current liabilities are paid from the current assets. The current ratio can be increased from1.5 to2 if the company pays50% of the current liabilities (200,000 -100,000). This $100,000 decrease in the current liabilities will result the same $100,000 decrease in the current assets. Thus, the new balances of the current assets and the current liabilities will be $200,000 and $100,000 respectively. Due to this fact, the new current ratio will be $200,000 ÷ $100,000 =2.