Detailed Answer
Correct answer: (B)
A 2:1 current ratio means that Bobcat has twice the book value of current assets as its book value of current liabilities.
For example, current assets (CA) of $200,000, with current liabilities (CL) of $100,000, would give a current ratio of CA/CL = $200,000/$100,000 = 2:1. Because Bobcat’s current ratio is greater than 1:1, an equal dollar decrease in current assets and current liabilities will be a greater percentage decrease in current liabilities than in current assets, resulting in an increase in the ratio of remaining current assets and liabilities.
Assuming the above values, paying off $10,000 of accounts payable would result in a reduction in the current asset cash ($200,000 - $10,000 = $190,000), and an equal dollar reduction in the current liability accounts payable ($100,000 - $10,000 = $90,000). The resulting new current ratio would be $190,000/$90,000 = 2.11:1, an increase over the previous 2.00:1.
