Marshall Tool and Die Company have been experiencing significant foreign
Marshall Tool and Die Company have been experiencing significant foreign competition and a declining market. Annual net losses from operations have averaged $250,000 over the last three years. The company’s balance sheet as of December 31, 2017, is as follows:
After analyzing accounts receivable and inventory, it has been determined that the allowance for un-collectibles should be increased by $75,000 and the inventory should be written down by $20,000. Based on recent appraisals, it is estimated that the plant and equipment have a market value of $1,285,000. The goodwill is traceable to the purchase of a small tooling company in 2013. Based on an analysis of cash flows associated with that acquisition, it is estimated that the goodwill has an impaired value of $0. Other assets represent a note receivable from officers of the corporation. The note calls for five annual payments of $8,309 including interest at the rate of 6%.
In response to the current situation, the company has decided to take the following actions:
a. Record the suggested impairment in all assets.
b. Restructure the note receivable from the officers to reflect four annual payments and an interest rate of 7.5%.
c. Restructure the note payable, which was due in 2019, to provide for 12 semiannual payments of $120,000 including interest at the annual rate of 6%.
d. Engage in quasi-reorganization to eliminate the deficit in retained earnings.
1. Prepare a revised classified balance sheet to reflect the effect of management’s actions.
2. Compute the following ratios before and after management’s actions: current ratio and debt-to-equity ratio.
3. Given the above ratio analysis, if the ratios do not suggest an improvement, discuss the benefits of management’s actions.
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