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:
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.
