Carlton, Inc

question 63

Multiple Choice

Carlton, Inc. presented the following information in a note to its financial statements for the year ending December 31, 2017:

The company has a loan agreement with Beachside Bank that states:

1. The current ratio should remain at least 2.0 to 1 at all times.
2. The debt-to-equity ratio should not exceed 0.7 to 1 at any time.
3. The times interest earned should be 5.0 or better.
4. The inventory turnover should be 4.0 or better.

The ratios at year-end are current ratio, 2.3 to 1; debt-to-equity ratio, 0.6 to 1; times interest earned, 7.1; and inventory turnover, 3.7. Which of the following statements is true?

• A)Carlton was in default because of the inventory turnover.
• B)Carlton was in default because of the current ratio.
• C)Carlton was in default because of the debt-to-equity ratio.
• D)Carlton was in default because of the times interest earned.

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