Question

The ratio of Current Assets (₹ 32,00,000) to Current Liabilities (₹ 20,00,000) is 1.6 : 1. The accountant of the firm is interested in maintaining a Current Ratio of 2 : 1, by paying off a part of the Current Liabilities. Compute the amount of the Current Liabilities that should be paid so that the Current Ratio at the level 2 : 1 may be maintained.

Answer 1

Payment of current liabilities will result in an equivalent reduction both in the amount of current assets as well as current liabilities.

Let the amount of current liabilities to be paid = x

Thus, Current Ratio = `"Current Assets"/"Current Liabilities"`

2 = `(₹ 32,00,000 − x)/(₹ 20,00,000 − x)`

2(₹ 20,00,000 − x) = ₹ 32,00,000 − x

₹ 40,00,000 − 2x = ₹ 32,00,000 − x

2x − x = ₹ 40,00,000 − ₹ 32,00,000

x (Current Liabilities) = ₹ 8,00,000

Current liabilities amounting to ₹ 8,00,000 be paid so that the current ratio may be maintained at the level of 2 : 1.

Verification:

Current Assets after payment of current liabilities of ₹ 8,00,000

= ₹ 32,00,000 − ₹ 8,00,000

= ₹ 24,00,000

Current Liabilities after payment of current liabilities of ₹ 8,00,000

= ₹ 20,00,000 − ₹ 8,00,000

= ₹ 12,00,000

Current ratio after payment = `(₹ 24,00,000)/(₹ 12,00,000)`

= 2 : 1

Therefore, Current Liabilities of ₹ 8,00,000 must be paid to achieve the Current Ratio at the level of 2 : 1.