Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests $80,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what is the maximum amount of current liabilities it could have without violating the debt contract?
A)$93,333
B)$133,333
C)$146,667
D)$102,000

Question

Quizplus · Accepted Answer

After borrowing $100,000, Jake's current assets become $120,000 + $20,000 (the part of the loan kept as cash or short-term investment) = $140,000. To maintain a current ratio of 1.5:1, the maximum current liabilities can be calculated as $140,000 / 1.5 = $93,333.

Jake Company Borrowed $100,000 from Guaranty Trust Bank to Finance