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Answer (B) is correct . The current ratio is computed by dividing current assets by current liabilities. The declaration of a dividend increases liabilities (to $1,200,000) and thus decreases the ratio. After the declaration, the ratio is 2.0 ($2,400,000 ¡Â $1,200,000). It was originally 2.4 ($2,400,000 ¡Â $1,000,000). The subsequent payment decreases both current assets and current liabilities by $200,000. The ratio is then 2.2 ($2,200,000 ¡Â $1,000,000). Therefore, the payment of the current liability increases the current ratio.<
Answer (A) is incorrect because The dividend declaration increases liabilities and decreases the current ratio. The subsequent payment decreases both current assets and current liabilities by the same amount, thereby increasing a current ratio in excess of one.
Answer (C) is incorrect because The dividend declaration increases liabilities and decreases the current ratio. The subsequent payment decreases both current assets and current liabilities by the same amount, thereby increasing a current ratio in excess of one.
Answer (D) is incorrect because The dividend declaration increases liabilities and decreases the current ratio. The subsequent payment decreases both current assets and current liabilities by the same amount, thereby increasing a current ratio in excess of one.