Question

The ratio of Current Assets (₹ 9,00,000) to Current Liabilities is 1.5 : 1. The accountant of this firm is interested in maintaining a Current Ratio of 2 : 1 by paying some part of Current Liabilities. You are required to suggest him the amount of Current Liabilities which must be paid for this purpose.

Answer 1

Calculation of Current Liabilities before Current Liabilities paid:

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

1.5 = `(₹ 9,00,000)/"Current Liabilities"`

Current Liabilities = `(₹ 9,00,000)/1.5`

= ₹ 6,00,000

Calculation of Current Liabilities to be paid to maintain Current Ratio 2 : 1

Let’s assume the amount of Current Liabilities to be paid is x.

Current Assets = ₹ 9,00,000 − x

Current Liabilities = ₹ 6,00,000 − x

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

2 = `(₹ 9,00,000 − x)/(₹ 6,00,000 − x)`

2 (₹ 6,00,000 − x) = ₹ 9,00,000 − x

₹ 12,00,000 − 2x = ₹ 9,00,000 − x

2x − x = ₹ 12,00,000 − ₹ 9,00,000

x (Current Liabilities) = ₹ 3,00,000

Therefore, Current Liabilities of ₹ 3,00,000 must be paid to maintain a Current Ratio of 2 : 1.