of Mara Construction Company, you are reviewing with your assistant, Dave yang\'

ID: 2585845 • Letter: O

Question

of Mara Construction Company, you are reviewing with your assistant, Dave yang'au, the financial statements for the year just ended. During the review Nyang' (NBK) Mara has agreed to the following conditions: . The current ratio . The debt-to-equity ration will not exceed 0.5 to 1.0 at any time. Nyang'au has drawn up the following preliminary, condensed statement of financial position for the year just ended au reminds you of an existing loan agreement with the National Bank of Kenya will be maintained at a minimuní level of 1.5 to 1.0 at all times Mara Construction Company Statement of financial position As at March 31 2016 ASSETS Current Assets ·Long-term Assets Total Assets Sh.16 64 80 Sh. Page 2 of 4

Explanation / Answer

1. Current Ratio=Current Assets/Current Liabilities

=16/10=1.60

Debt-Equity Ratio

=15/55

=0.27

The above ratios are in compliance with the loan agreement of NBK

3. If the company plan is to extend the maturity of long term debt of Sh. 5.00 Million loan from Equatorial Bank, then it will shown under the long term debt.

The company have received Sh. 20 Million from Nationl Givernment and company have recorded it as a revenue, but the same should be shown as Current Liabilities and charged to revenue as the work Performed.

On the basis of the same the New Current Ratio will be=Current Assets/Current Lianilities

=16/10+20

=16/30

=0.53

There will no change in Debt-Equity Ratio as the company have already shown the long term debts under Long term liability head.

But, there is a change in the current ratio.