Hanley Limited manufactures camera equipment. The company plans to list its shares on the Venture Exchange. To do so, it must meet all of the following initial listing requirements (among others):
1. Net tangible assets must be at least $500,000.
2. Pre-tax earnings must be $50,000.
3. The company must have adequate working capital.
Hanley has experienced significant growth in sales and is having difficulty estimating its bad debt expense. During the year, the sales team has been extending credit more aggressively in order to increase commission revenues. Under the percentage-of-receivables approach using past percentages, the estimate is $50,000. Hanley has performed an aging and estimates the bad debts at $57,000. Finally, using a percentage of sales, the expense is estimated at $67,000. Before booking the allowance, net tangible assets are approximately $550,000. The controller decides to accrue $50,000, which results in pre-tax earnings of $60,000.
Instructions
Adopt the role of the Venture Exchange staff and decide whether the company meets the financial aspects of the initial requirements for listing on the Venture Exchange.