Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line skate he had designed for doing aerial t

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Venice InLine, Inc., was founded by Russ Perez to produce a
specialized in-line skate he had designed for doing aerial tricks.
Up to this point, Russ has financed the company with his own
savings and with cash generated by his business. However, Russ now
faces a cash crisis. In the year just ended, an acute shortage of
high-impact roller bearings developed just as the company was
beginning production for the Christmas season. Russ had been
assured by his suppliers that the roller bearings would be
delivered in time to make Christmas shipments, but the suppliers
were unable to fully deliver on this promise. As a consequence,
Venice InLine had large stocks of unfinished skates at the end of
the year and was unable to fill all of the orders that had come in
from retailers for the Christmas season. Consequently, sales were
below expectations for the year, and Russ does not have enough cash
to pay his creditors.
Well before the accounts payable were due, Russ visited a local
bank and inquired about obtaining a loan. The loan officer at the
bank assured Russ that there should not be any problem getting a
loan to pay off his accounts payable—providing that on his most
recent financial statements the current ratio was above 2.0, the
acid-test ratio was above 1.0, and net operating income was at
least four times the interest on the proposed loan. Russ promised
to return later with a copy of his financial statements.
Russ would like to apply for a $120,000 six-month loan bearing
an interest rate of 10% per year. The unaudited financial reports
of the company appear below:
Required:
1-a. Based on the above unaudited financial statement of the
current year calculate the following.
1-b. Based on the statement made by the loan officer, would the
company qualify for the loan?
2. Last year Russ purchased and installed new, more efficient
equipment to replace an older plastic injection molding machine.
Russ had originally planned to sell the old machine, but found that
it is still needed whenever the plastic injection molding process
is a bottleneck. When Russ discussed his cash flow problems with
his brother-in-law, he suggested to Russ that the old machine be
sold or at least reclassified as inventory on the balance sheet
because it could be readily sold. At present, the machine is
carried in the Property and Equipment account and could be sold for
its net book value of $90,000. The bank does not require audited
financial statements.
a. Calculate the following if the old machine is considered as
inventory.
b. Based on the 2a answer would the company qualify for the
loan?
c. Calculate the following if the old machine is sold off.
d. Based on the 2c answer would the company qualify for the
loan?