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

question 20

Multiple Choice

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

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Definitions:

Goblet Cell

A column-shaped cell found in the respiratory and intestinal tracts, which secretes mucus to trap and move pathogens and dirt.

Seromucous Gland

A gland that produces both serous fluid (a watery solution) and mucous (a thicker, protective secretion).