Longboards Inc. was founded by Riley Thomas to produce a longboard he had designed for cruising. Long boards are catching up to skateboards in popularity because of their speed and durability. Up to this point, Thomas has financed the company with his own savings, an injection of cash from his parents, and earnings generated by his business. However, Thomas now faces a cash crisis. In the year just ended, an acute shortage of a vital tungsten steel alloy developed just as the company was beginning production for the summer season. Thomas had been assured by his suppliers that the steel would be delivered in time to make summer shipments, but the suppliers had been unable to fully deliver on this promise. As a consequence, Longboard Inc. had a large inventory of unfinished longboards at the end of the year and was unable to fill all of the orders that had come in from retailers for the summer season. Consequently, sales were below expectations for the year, and Thomas does not have enough cash to pay his creditors. Thomas would like to apply to the bank for a $200,000 one-year loan bearing an interest rate of 4% per year. The loan officer at Thomas's bank indicated that to qualify for a loan, Longboards Inc. must have a current ratio higher than 2.0, an acid-test ratio higher than 1.0, and times interest earned must be at least 5.

The unaudited financial balance sheet and income statement of the company appear below:

Required

1. Based on the above unaudited financial statements and the criteria identified by the loan officer, would the company qualify for the loan? Calculate times interest earned as if the $200,000 loan has been granted by the bank.
2. Last year Thomas purchased and installed new, more efficient equipment to replace equipment he had originally acquired second-hand. He had originally planned to sell the old equipment but found that it is still needed whenever the heat-treating process is a bottleneck. When Thomas discussed his cash flow problems with his brother-in-law, he suggested to Thomas that the old equipment be sold or at least reclassified as inventory on the balance sheet since it could be readily sold. At present, the equipment is carried in the Property and Equipment account and could be sold for its net book value of $136,000. The bank does not require audited financial statements. What advice would you give to Thomas concerning the equipment?

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LONGBOARDS INC. Comparative Balance Sheet As of December 31, This Year and Last Year (in thousands of dollars) Assets Current assets: Cash.. Accounts receivable, net Inventory.. Prepaid expenses.. Total current assets. Property and equipment, net.. Total assets .. Liabilities and Shareholders' Equity Current liabilities: Accounts payable Accrued payables Total current liabilities. Lo g-term liabilities Total liabilities Shareholders' equity: Common shares.. Retained earnings. Total shareholders' equity. Total liabilities and shareholders' equity This Year $ 210 150 480 30 870 810 $1,680 $ 462 30 492 0 492 300 888 1,188 $1,680 Last Year $ 450 120 300 36 906 540 $1,446 $ 270 30 300 0 300 300 846 1,146 $1,446