Question

In late 2017, Bedeque Ltd. (Bedeque) arranged a long term loan of $1,000,000 from a local bank to provide $250,000 in needed working capital and $750,000 to finance the purchase of some new equipment. The loan would be repayable in four years. However, the terms of a previous loan require that the company maintain a current ratio greater than 1.5 and a debt-to-equity ratio of less than 1. If either of these restrictions isn’t met, the loan would have to be repaid within 30 days. The previous loan agreement also states that for Bedeque to pay dividends, retained earnings must be greater than $1,700,000 after the dividend. Bedeque’s controller has asked you to figure out how the new loan will affect the restrictions on the December 31, 2017 balance sheet. Bedeque’s shareholders are expecting a dividend in early 2018 so the controller also wants to know how much can be paid. The controller has provided you with a projected balance sheet for December 31, 2017. The balance sheet takes into consideration all expected economic activity through the end of the year (including the closing entry), except for the impact of the new loan.


Required:
Prepare a report that provides the information the controller wants. Explain your findings andreasoning.


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  • CreatedFebruary 26, 2015
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