Linton Industries borrowed $500,000 from Security Bankers to finance the purchase of equipment costing $360,000 and to provide $140,000 in cash. The note states that the loan matures in twenty years, and the principal is to be paid in annual installments of $25,000. The terms of the loan also indicate that Linton must maintain a current ratio of 2:1 and cannot pay dividends that will reduce retained earnings below $200,000. The balance sheet of Linton, immediately prior to the bank loan and the purchase of equipment follows:

REQUIRED:The board of directors of Linton is about to declare a dividend to be paid to the shareholders early next year. After accepting the loan and purchasing the equipment, how Large a dividend can the board pay and not violate the terms of the debt covenant?

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Current assets Noncurrent assets S 120,000 Current liabilities Long-term liabilities Capital stock S 100,000 1,500,000 300,000 1,000,000 220,000 Retained earnings Total liabilities and shareholders' equity $1,620,000 S1,620,000 Total assets