A loan agreement between a bank and a customer specified that the debt ratio could not exceed 60 percent. Explain the purpose of this restrictive agreement.
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A loan agreement between a bank and a customer specified that the debt ratio could not exceed 60 percent. Explain the purpose of this restrictive agreement.
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- Debtholders receive note contracts, one for each note, that describe the payments promised by the issuer of the debt. In addition, the issuing corporation frequently enters a supplementary agreement, callcd a note indenture, with a trustee who represents the debtholders. The provisions or covenants of the indenture may place restrictions on the issuer for the benefit of the debtholders. For example, an indenture may require that the issuers debt to equity ratio never rise above a specified level or that periodic payments be made to the trustee who administers a sinking fund to provide for the retirement of debt. Consider Roswell Manufacturings debt indenture, which requires that Roswells debt to equity ratio never exceed 2:1. If Roswell violates this requirement, the debt indenture specifies very costly penalties, and if the violation continues, the entire debt issue must be retired at a disadvantageous price and refinanced. In recent years, Roswells ratio has averaged about 1.5:1 ($15 million in total liabilities and $10 million in total stockholders equity). However, Roswell has an opportunity to purchase one of its major competitors, Ashland Products. The acquisition will require $4.5 million in additional liabilities, but it will double Roswells net income. Roswell does not believe that a stock issue is feasible in the current environment. The Financial Accounting Standards Board issued a new standard concerning accounting for post employment benefits, which is strongly supported by the Securities and Exchange Commission. Implementation of the new standard will add about S2 million to Roswells long-term liabilities. Roswells CEO. Martha Cooper, has written a strong letter of objection to the FASB. The FASB received similar letters from over 300 companies. Required; 1. Write a paragraph presenting an analysis of the impact of the new standard on Roswell Manufacturing.Debtholders receive note contracts, one for each note, that describe the payments promised by the issuer of the debt. In addition, the issuing corporation frequently enters a supplementary agreement, called a note indenture, with a trustee who represents the debtholders. The provisions or covenants of the indenture may place restrictions on the issuer for the benefit of the debtholders. For example, an indenture may require that the issuers debt to equity ratio never rise above a specified level or that periodic payments be made to the trustee who administers a sinking fund to provide for the retirement of debt. Consider Roswell Manufacturings debt indenture, which requires that Roswells debt to equity ratio never exceed 2:1. If Roswell violates this requirement, the debt indenture specifies very costly penalties, and if the violation continues, the entire debt issue must be retired at a disadvantageous price and refinanced. In recent years, Roswells ratio has averaged about 1.5:1 ($15 million in total liabilities and $10 million in total stockholders equity). However, Roswell has an opportunity to purchase one of its major competitors, Ashland Products. The acquisition will require $4.5 million in additional liabilities, but it will double Roswells net income. Roswell does not believe that a stock issue is feasible in the current environment. The Financial Accounting Standards Board issued a new standard concerning accounting for post employment benefits, which is strongly supported by the Securities and Exchange Commission. Implementation of the new standard will add about S2 million to Roswells long-term liabilities. Roswells CEO. Martha Cooper, has written a strong letter of objection to the FASB. The FASB received similar letters from over 300 companies. Required; 2. If you were a member of the FASB and met Martha Cooper at a professional meeting, how would you respond to her objection?Gara Co. reported the following liabilities at December 31, 20x1: Accounts payable-trade 750,000 Short-term borrowings 400,000 Bank loan, current portion ₱100,000 3,500,000 Other bank loan, matures June 30, 20x2 1,000,000 The bank loan of ₱3,500,000 was in violation of the loan agreement. The creditor had not waived the rights for the loan. What amount should Gara report as current liabilities at December 31, 20x1?
- Before the end of the reporting period, MetaFace Company breaches a covenant under a long-term loan agreement with BookWorm Bank. The loan will be classified as _______________. CURRENT, provided BookWorm gives MetaFace, before the end of the reporting period, a grace period ending at least twelve months after the reporting period CURRENT, since the loan will be payable on demand NONCURRENT, provided BookWorm gives MetaFace, after the end of the reporting period but before issuance of financial statements, agreed not to demand payment even a breach has been made NONCURRENT, since MetaFace will plan to make up with the consequences of the breach of loan contractwhich of the following statements is not valid in determining statement of financial position disclosure of accounts receivable?a. accounts receivable should be identified on the statement of financial position as "pledged" if they are used as security for a loan though the loan is shown on the same statement of financial position as a liability.b. the portion of installment accounts receivable from customers which falls due more than 12 months from the statement of financial position date usually would be excluded from current assetsc. allowance to be deducted from accounts receivable for discounts returns and adjustments to be made in the future on accounts are shown in the current statement of financial positiond. trade receivables are best shown separately from nontrade receivables where amounts of each are materialCommercial (in contrast to consumer) line of credit is an agreement between a customer and a bank that a. is renewed at the end of the contract period in an evergreen facility. b. gives the customer the right to borrow up to a predetermined amount. c. is usually for one year or longer. d. may not obligate the bank to honour the customer’s request for a loan The APR is a. the average annual percentage cost paid on deposits b. the average rate paid on deposits c. the average rate paid for credit d. the average annual percentage cost paid for credit
- Which of the following is not a way in which banks lend short-term unsecured loans? Through credits cards lines with a certain credit limit Through a guaranteed credit line that has a commitment fee for any unused amount for the year By sending the amount earned from trust and investment products offered by the bank By lending a single date maturity loan to a debtorYou are working for FASB and have been assigned the role of organizing new guidance in the codification. Which would be the appropriate section in the codification for the following: "Borrowings outstanding under certain revolving credit agreements are considered long-term debt because the borrowings are due at the end of a specified period" Question 20 options: a) Other Presentation Matters b) Initial Measurement c) Subsequent Measurement d) RecognitionPursuant to the Fair Credit Reporting Act, a consumer reporting agency must adopt reasonable procedures to ensure that ____________ a. open-end credit plans are fully disclosed b. consumers receive minimum warranty protection c. creditors do not regularly extend consumer credit to a debtor in an amount greater than $25,000 d. obsolete information does not appear on credit reports e. the annual percentage rate (APR) does not exceed the total finance charge
- When firms enter into loan agreements with their bank, it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the situation of Advanced Autoparts (AAP) in 2009. The firm had total current assets of $1,907,570,000 and current liabilities of $1,362,550,000. a. What is the firm's current ratio? b. If the firm were to expand its investment in inventory and finance the expansion by increasing accounts payable, how much could it increase its inventory without reducing the current ratio below 1.2? c. If the company needed to raise its current ratio to 1.5 by reducing its investment in current assets and simultaneously reducing accounts payable and short-term debt, how much would it have to reduce current assets to accomplish this goal? Question content area bottom Part 1 a. What is the firm's…When firms enter into loan agreements with their bank, it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the situation of Advanced Autoparts (AAP) in 2009. The firm has total current assets of $1,780,195,300 and current liabilities of $1,369,381,000. What is the firm’s current ratio? If the firm were to expand its investment in inventory and finance the expansion by increasing accounts payable, how much could it increase its inventory without reducing the current ratio below 1.2? If the company needed to raise its current ratio to 1.5 by reducing its investment in current assets and simultaneously reducing accounts payable and short-term debt, how much would it have to reduce current assets to accomplish this goal?Which of the following is not a way in which banks lend short-term unsecured loans? a. Through a guaranteed credit line that has a commitment fee for any unused amount for the year b. Through credits cards lines with a certain credit limit c. By sending the amount earned from trust and investment products offered by the bank d. By lending a single date maturity loan to a debtor