Question
Acme Corporation uses the calendar year as their fiscal year for reporting purposes.Acme Corporation is owned 100% by Jesse Smith.Jesse Smith is quite wealthy -
Acme Corporation uses the calendar year as their fiscal year for reporting purposes.Acme Corporation is owned 100% by Jesse Smith.Jesse Smith is quite wealthy - he has over $3 million in a personal savings account which is currently earning2one hundredthsof 1% interest(or .0002 rateresulting in $600 per year).He also has many other investments.Acme Corporation has $300,000 of current assets.Acme has Accounts Payable of $40,000 and various Payroll liabilities totaling $109,000.Acme also has a Note Payable in the amount of $800,000.There are no other liabilities.Interest has been paid every year when due on December 31.The Note Payable is due in $200,000 installments on June 30 of each year for the next 4 years.The current interest rate on the note is 4%.However, according to the loan terms, if Acme's current ratio falls below 2, the interest rate will automatically increase to 7%.Since the note is due in installments over the next 4 years, management is presenting the Note on the balance sheet as a long term liability.Is Acme's management reporting their balance sheet appropriately?What recommendations do you have for management?How do these recommendations impact the current ratio?
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