The bond indentured for the 20-year, 11% debenture bonds datedJanuary 2, 2007, r
ID: 2457691 • Letter: T
Question
The bond indentured for the 20-year, 11% debenture bonds datedJanuary 2, 2007, required working capital of $560,000, a currentratio of 1.5, and a quick ratio of 1.2, at the end of each calendaryear until the bonds mature. At December 31, 2008, the threemeasures were computed as follows:
Cash 190,000
Marketablesecurities 95,000
Accounts and notes receivable(net) 171,000
Inventories 20,000
Prepaidexpenses 4,500
Intangibleassets 55,000
Property, plant, andequipment 65,000
Total current assets(net) 600,500
CurrentLiabilities:
Accounts and short-term notespayable 250,000
Accruedliabilities 150,000
Total currentliabilities 400,000
Workingcapital 200,500
Explanation / Answer
1. Net working capital Current assets - current liabilities Current assets Cash 190,000 M.securities 95,000 A/R 171,000 Inventories 20,000 Prepaid 4,500Total C.assets 480,500 Current liabilities N/P + accrued liabilities 250,000 + 150,000 = 400,000 A.Net working capital = 480,500 - 400,000 = 80,500 B.Current Ratio Current assets / current liabilities 480,500 / 400,000 = 1.2 C. Quick Ratio Cash + Marketable securities + Receivables Current liabilities 190,000 + 95,000 + 171,000 400,000 = 1.14 Question 2 The bond requirement is working capital = 560,000 current ratio = 1.5 quick ratio = 1.2 But the actual is working capital - 80,500 ; current ratio - 1.2 ;quick ratio - 1.4 So, the company is not satisfying the terms of the bondindenture.
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