The ratio of Current Assets (Rs. 6,00,000) to Current Liabilities (Rs. 4,00,000) is 1.5 : 1. The accountant of the firm is interested in maintaing a current ratio of 2 : 1, by paying off a part of the Current Liabilities. Compute the amount of Current Liabilities that should be paid, so that the current ratio at the level of 2 : 1 may be maintained.

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Solution

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

Let the amount of current liabilities to be paid = x

Thus, Current Ratio = $\frac{Current Assets}{C u r r e n t L i a b i l i t i e s}$

= $\frac{R s . 6, 00, 000 - x}{R s . 4, 00, 000 - x} = 2$

Or Rs. 8,00,000 - 2x = 6,00,000 - x

x = 2,00,000.

Current liabilities amounting to Rs. 2,00,000 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 Rs. 2,00,000

= 6,00,000 - 2,00,000 = 4,00,000

Current Liabilites after payment of current liabilities of Rs.2,00,000

= 4,00,000 - 2,00,000 = 2,00,000

Current ratio after payment = $\frac{4, 00, 000}{2, 00, 000} = 2 : 1$

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