Accounting Question, (current ratio)?

Question

A COMPANY WITH A WORKING CAPITAL OF 500,000 AND A CURRENT RATIO OF 2:1 PAYS A 100,000 SHORT TERM LIABILITY

A- THE AMOUNT OF WORKING CAPITAL IMMEDIATELY AFTER THE PAYMENT IS?

B- THE CURRENT RATIO IMMEDIATELY AFTER THE PAYMENT IS?

Answer 1

Current Ratio (CR) is Current Assets (CA) divided by Current Liabilities (CL) and it is 2:1, i.e., CA is twice the CL. Working Capital (WC) is CA minus CL and this is 500,000. So if CA is twice CL, CA must be 1,000,000 and CL must be 500,000. If the co. pays off a short term liability of 100,000, both CA and CL drop by 100,000, so CA becomes 900,000 and CL becomes 400,000.

A- THE AMOUNT OF WORKING CAPITAL IMMEDIATELY AFTER THE PAYMENT IS?
WC = CA - CL, i.e. WC = 900,000 - 400,000 = 500,000

B- THE CURRENT RATIO IMMEDIATELY AFTER THE PAYMENT IS?
CR = CA/CL = 900,000/400,000 = 2.25:1