Question

Acme Corporation uses the calendar year as their fiscal year for reporting purposes. Acme Corporation is owned 100% by Jesse Smith.   Jesse Smith is quite wealthy - he has over $3 million in a personal savings account which is currently earning 2 one hundredths of 1% interest (or .0002 rate resulting in $600 per year). He also has many other investments. Acme Corporation has $300,000 of current assets. Acme has Accounts Payable of $40,000 and various Payroll liabilities totaling $109,000. Acme also has a Note Payable in the amount of $800,000. There are no other liabilities. Interest has been paid every year when due on December 31. The Note Payable is due in $200,000 installments on June 30 of each year for the next 4 years. The current interest rate on the note is 4%. However, according to the loan terms, if Acme's current ratio falls below 2, the interest rate will automatically increase to 7%. Since the note is due in installments over the next 4 years, management is presenting the Note on the balance sheet as a long term liability. Is Acme's management reporting their balance sheet appropriately? What recommendations do you have for management? How do these recommendations impact the current ratio?

Answer 1

ANSWER:

Acme's administration isn't revealing the obligation suitably in a critical position sheet. As per accounting conventions, any liability which is payable within 12 months of the end of the reproting period is required to be classified as current. For this situation, according to the agreement terms, organization needs to pay portions each year and the organization likewise doesn't appear to have an uncondore, option to concede the portion. Along these lines, the following portion due must be accounted for by the organization as present liabilities and not as non current obligation.

Renaming of this sum as a present risk will affect the present proportion. The present risk will increment by 100,000. The updated measure of current liabilities will be (109,000+40,000+100,000)= 249,000. Current resources are 300,000. In this way, the present proportion is (300,000/249,000)=1.2. Threfore, this renaming will imapct the present proportion and along these lines, liable to draw in higher loan fee on the note payable.

PLEASE UPVOTE.