Question

Dividend Aristocrat Inc. (DA) borrowed $197,000 from Grow Business Bank to finance the purchase of equipment costing $147,750 and to provide $49,250 in cash. The legal documentation states that the loan matures in 20 years, and the principal is to be paid in annual instalments of $9,850. The terms of the loan also indicate that DA must maintain a current ratio of 1.25 and cannot pay dividends that will reduce retained earnings below $97,000. The 2020 year-end statement of financial position, immediately prior to the bank loan and the purchase of equipment, follows: Current liabilities $110,760 $78,000 Current assets Long-term liabilities Non-current assets 406,240 197,000 Common shares 109,000 Retained earnings 133,000 Total liabilities and $517 $5 00 shareholders' equity 7,00 Total assets Prepare the following statement of financial position assuming the maximum divided is declared and paid Current Liabilities Current Assets Long-term Lia bilities Non-current Assets Common Shares Retained Earnings Total Liabilities and $ Shareholder's Equity $ Total Assets Calculate the current ratio using the updated statement of financial position. (Round answer to 2 decimal places, e.g. 7.25.) Current Ratio in compliance with the loan agreeement Dividend Aristocrat Inc.

Answer 1

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Answer: Current Ratio = current Assets went liabilities Balance sheet after equipment purchase: 160,000 I current Assets 110,760) (t) Cash 49250 Non-current Assets previous 406, 240 t Equipment $47.750 553990 current liab. previous 78000 Loan garo 87850 Long Term Liab. (1970004 384150 1976-9850 common shares 109000 Retained earnings 133.000 Retained e Totals +14000 1 4070_ Since first EMI would be payable in the next year, hence adjusted in the current Liabilities. Remaining Loan amount will be shown in the Long Term Lidb." (197600- 9850) Calculation of Maximum amount that we can declare as dividend :- As per Retained earning - 133000-97000) J $36000 can be declosed as dividend NOW current Ratio should not fall below 1.25 after declaring $36000 dividend. current Assets = 160010 - 36000 = $ 124010 current Liab. = $87850

Current Ratio = 19401041 87850 Since current Ratio will be more than 1.95 after payment of dividend, $36000 can be paid as dividend. Updated Balance sheet after Div. payment 124010 current Assets (160,010- 36000) Current Liab. 87850 Long Term Liab. 384150 109000 Non-current Assets 553990 common shares Retained earnings 1(133000 36000 97000 Total 678000 Total 678050