Question
Acme Corporation uses the Calendar year for reporting purposes. Acme Corporation is owned 100% by Jesse Smith. Jesse Smith is quite wealthy - he has
Acme Corporation uses the Calendar 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 earning 2 one hundredths of 1% interest ( or .0002 rate resulting in $600 per year). He also has many other investments. Acme Corporation has $300,000 of current assets. Acme has Accounts Payable and various Payroll liabilities in the amount of $149,000. 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. Evaluate the correctness of Acme's balance sheet. Evaluate management's actions. Suggest a better course of action.
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