Jurgen's Equipment Reclassification
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1. On the basis of the above unaudited financial statements and the statement made by the loan officer, would the company qualify for the loan.
2. Last year Jurgen purchased and installed new, more efficient equipment to replace an older heat treating furnace. Jurgen had originally planned to sell the old equipment but found that it is still needed whenever the heat-treating process is a bottleneck. When Jurgen discussed his cash flow problems with his brother-in-law, he suggested to Jurgen that the old equipment be sold or at least reclassified as inventory on the balance sheet since it could be readily sold. At present, the equipment is carried in the property and equipment account and could be sold for its net book value of $68 thousand. The bank does not require audited financial statements. What advice would you give to Jurgen concerning the machine?
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Solution Summary
The solution deals with Jurgen's and the potential reclassification of older equipment.
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1. The banker wants the company to have:
Current Ratio above 2.0
Acid Ratio above 1.0
Net Operating Income 4 times Loan's Interest
The company's data looks like this:
Current Ratio=Current Assets/Current Liabilities=$435,000/$246,000=1.77
Acid Test=(Current Assets-Inventories)/Current Liabilities=($435,000-$240,000)/$246,000=$195,000/$246,000=0.79
Proposed Loan Interest=$120,000 6 moth loan, 10% annual interest; 10% annual=5% 6 month interest
5% interest on $120,000=$6,000------Net Operating Income reported was $30,000
Discussion
The company's net operating income is 5 times the proposed interest and meets the ...
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