## A firm had Current Assets of Rs. 5,00,000. It paid Current Liabilities of Rs. 1,00,000 and the Current Ratio became 2: 1. Determine Current Liabilities and Working Capital before and after the payment was made.

SOLUTION

Firm disposed off liabilities of Rs. 1,00,000 which results in decrease in current liabilities and current assets by the same amount.

After disposing liabilities:

Current Assets =  Rs. 4,00,000 (Rs. 5,00,000 – Rs. 1,00,000)
And, Let Current Liabilities be (x – Rs. 1,00,000)

Current ratio = Current assets / Current liabilities
2: 1 = 4,00,000 / (x – 1,00,000)
4,00,000 = 2x – 2,00,000
6,00,000 = 2x
Therefore, x = 3,00,000

Current Liabilities after payment = x – Rs. 1,00,000
= Rs. 2,00,000

Working Capital after Payment = Current Assets – Current Liabilities
= Rs. 4,00,000 – Rs. 2,00,000
= Rs.  2,00,000

Current Assets before payment = Rs. 5,00,000
Current Liabilities before Payment = Rs. 3,00,000
Therefore, Working Capital Before Payment = Current Assets – Current Liabilities
= Rs. 5,00,000 –  Rs. 3,00,000 =  Rs. 2,00,000