A summary of the December 31, 2011 balance sheet of Ellington Industries follows:
Land investments 55,000
Liabilities and Shareholders’ Equity
Accounts payable $ 9,000
Long-term liabilities 30,000
Shareholders’ equity 28,000
Total liabilities and shareholders’ equity$67,000
On January 1, 2012, the company borrowed $40,000 (long-term debt) to purchase additional land. The debt covenant states that Ellington must maintain a current asset balance at least twice as large as its current liability balance over the period of the loan.
a. As of January 1, 2012, how much of the $40,000 can Ellington invest in land without violating the deb covenant?
b. Assume that Ellington invested the maximum allowable in land. Prepare Ellington’s balance sheet as of January 1, 2012. Computer the following rations: current assets/current liabilities and total liabilities/total assets.
c. Assume that Ellington invested the maximum allowable in land and that during 2012 it generated $150,000 in revenues (all cash), paid off the accounts payable outstanding as of December 31, 2011, and incurred $130,000 in expenses, of which $123,000 was paid in cash. The company neither purchased nor sold any of its long-term land investments, made no principal payments on the long-term debt, and issued no equity during 2012. Prepare a balance sheet as of the end of 2012, and compute how large a dividend the company can pay without violating the debt covenant. Compute total liabilities/total assets assuming that the company declares the maximum allowable dividend.
Armstrong Helmet Company manufactures a unique model of bicycle helmet Question Case project Learning Objectives: Prepare practical applications of course concepts Develop analytical and critical thinking Develop decision-making capabilities Enhance professional...