Needy Ltd has issued convertible notes under an agreement to maintain net assets, defined in the agreement as assets minus all liabilities except the convertible notes, at an amount not less than 2 times the amount of the convertible notes issued. Also under the agreement, working capital is to be maintained at not less than 100% of the convertible notes issued. Certain financial information for Needy Ltd is presented below.

Additional information

1. Needy Ltd had recorded, as at 30 June 2020, $160 000 of collections from its customers which were not received until 2 July 2020 on the basis that such collections were probably in the mail before midnight on 30 June 2020.

2. On the afternoon of 2 July 2020, Needy Ltd issued cheques to its creditors, dating and recording the cheques as at 30 June 2020. The cheques amounted to $160 000 which is equal to the collections in transit.

3. Needy Ltd is considering a 1-day extension on the due date of the loan payable to 1 July 2021.

Required

(a) Contrast, by means of comparative ratios, the reported conditions with those that you believe more appropriately represent the financial position of the company. Limit your comparison to the convertible note holders’ agreement.

(b) Explain if you believe the company met the conditions of the loan agreement.

(c) Discuss the purpose of having such conditions in loan agreements.

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Cash at bank Marketable securities Accounts receivable Allowance for doubtful debts Inventories Prepaid expenses Land Buildings NEEDY LTD Adjusted Trial Balance as at 30 June 2020 Debits $ 100 000 750 000 Credits 740 000 $ 30000 800 000 60 000 180 000 1 560 000