Question

Nord Company had $375,000 of current asserts and $150,000 of current liabilities before borrowing $70,000 form the bank with a 3-month note payable. What effect did the borrowing transaction have on the amount of Nord Company's working capital?

Answer 1

Answer:

The below are the missing options:

No effect

$70,000 increase

$140,000 increase

$70,000 decrease

The correct answer is a decrease of $70,000

Explanation:

Working capital=Current assets minus current liabilities

Before the borrowing ,working capital amount was as calculated below:

Current assets is $375,000

Current liabilities $150,000

Working capital=$375,000-$150,000

                          =$225,000

Upon borrowing $70,000 , current liabilities increased to $220,000($150,000+$70,000),hence a new working capital then be computed:

working capital=$375,000-$220,000

                         =$155000

The change in working capital is a decrease of  $70,000($225-$155,000)

Answer 2

Answer:

none, it remains the same

Explanation:

Working capital refers to the amount of money that a business uses in its day to day operations and is calculated by simply subtracting current liabilities from current assets.

in this case, before the loan, working capital = $375,000 - $150,000 = $225,000

this loan should have no effect on working capital since the loan increased both current assets (cash) and current liabilities (note payable).

= ($375,000 + $70,000) - ($150,000 + $70,000) = $225,000

If the loan had been used to purchase equipment or machinery, then current assets would have remained the same and only liabilities would have increased. This would have decreased working capital, but since we are not told what was the purpose of the loan, we can just assume it was used to increase current assets.