Romeo Productions
The following information was included in a note to the Year 1 financial statements of Romeo Productions:
The company has a loan agreement with First Provincial Bank that states:
1. The current ratio must be 2.0 or higher at all times.
2. The debt-to-equity ratio must not exceed 0.7 at any time.
3. The times interest earned ratio must be 5.0 or higher.
4. The inventory turnover ratio must be 4.0 or higher.

-Refer to the figure Romeo Productions.The company's ratios are: current ratio,2.3; debt-to-equity ratio,0.6; times interest earned ratio,7.1; and inventory turnover ratio,3.7.Based on this information,why was the company in default of its loan agreement?

Question

Romeo Productions
The following information was included in a note to the Year 1 financial statements of Romeo Productions:
The company has a loan agreement with First Provincial Bank that states:
 1.	The current ratio must be 2.0 or higher at all times.
2.	The debt-to-equity ratio must not exceed 0.7 at any time.
3.	The times interest earned ratio must be 5.0 or higher.
4.	The inventory turnover ratio must be 4.0 or higher.

-Refer to the figure Romeo Productions.The company's ratios are: current ratio,2.3; debt-to-equity ratio,0.6; times interest earned ratio,7.1; and inventory turnover ratio,3.7.Based on this information,why was the company in default of its loan agreement?

Quizplus · Accepted Answer

The company was in default of its loan agreement because its inventory turnover ratio of 3.7 did not meet the required minimum of 4.0 as stated in the loan agreement.

Romeo Productions the Following Information Was Included in a Note to the to the Year