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

question 29

Essay

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:

Logic Processing

The systematic handling of logical operations, often involving binary computations, within computing devices.

Nonvolatile Memory

A memory designed to retain its data while its power supply is turned off.

Programmed Contents

Data or instructions that have been configured into a system or device to control its operation.

Operating Power

The amount of power required by a device or system to perform its designated functions under normal conditions.