As you recall, Dry Supply has requested a loan for $60,000 to purchase three new vans. On December 31, 20xz, Dry Supply had borrowed $67,000 from owner Kaitlyn Nielson. To provide support to the loan request, in addition to the personal guarantees of the owners, State Bank may ask Ms. Nielson to subordinate to the bank debt owed to her from Dry Supply.

Answer the following questions using Dry Supply's financial information found at the end of Chapter 5 in the textbook. Apply what you have learned about guarantees and subordination agreements.

1. What are two ways that State Bank can ask that the loan from Dry Supply be subordinated?

2. What steps can State Bank take if Ms. Nielson has secured her debt with a lien on a specific piece of equipment?

APPENDIX A: DRY SUPPLY'S FINANCIAL INFORMATION Income Statement Spread: Dry Supply Income Statement Review ($ in S000) 12/31/20xx Amount % Review 12/31/20xy Amount % Review 12/31/20xz Amount % 100.0 100.0 $895 $918 100.0 $937 667 72.1 71.2 631 645 68.7 250 27.9 270 28.8 287 31.3 173 17.5 18.5 180 157 19.6 36 4.0 31 3.3 28 3.1 15 1.7 18 20 2.2. Net sales Cost of goods sold Gross profit Selling, gen and admin. expense Officer's compensation Rent expenses Bad debt expense Profit-sharing expense Depreciation expense Total operating expenses Operating income Other income 2 1 0 0.0 0.2 0.8 7 7 0 0.0 12 1.3 12 13 1.4 229 25.6 242 25.8 241 26.3 21 2.3 28 3.0 46 5.0 0 0.0 0 0.0 0 0.0 Interest income 2 0.2 2 2 0.2 3 0.3 3 3 0.3 Rental income Interest expense Net profit before tax 0.3 0.7 6 0.7 7 11 20 2.2 26 40 Income tax expenses 11 1.2 12 1.3 17 1.9 Net profit after tax $ 9 1.0 $ 14 1.5 $ 23 2.5 Balance Sheet Spread: Dry Supply Common size report (s in $000) Review 12/31/20xx Review 12/31/20xy Amount % Review 12/31/20xz Assets Amount % Amount % Cash $ 3 1.2 $ 12 4.6 $ 22 8.1 Accounts receivable 114 46.9 118 45.4 117 43.3 Less' allowance for doubtful accounts 5 2.1 5 1.9 5 1.9 Net accounts receivable 109 44.9 113 43.5 112 41.5 73 30.0 72 Inventory Total current assets 67 24.8 186 27.7 75.8 76.1 197 201 74.4 76 31.3 75 28.8 78 28.9 1 0.4 1 0 0.0 53 21.8 70 85 31.5 Furniture and fixtures Leasehold mprovements Transportation equipment Gross fixed assets Less: Accum. depreciation Net fixed assets Cash-value life insurance 130 0.4 26.9 56 2 373 146 163 60.4 53.5 35.0 85 97 110 40.7 45 18.5 49 18.8 53 19.6 5.3 14 5.4 13 $243 16 5.9 Total assets 1000 $260 100.0 $270 100.0 Common size report (s in $000) Review 12/31/20xx Review 12/31/20xy Review 12/31/20xz Liabilities Amount % Amount % Amount $81 33.3 $68 26.2 $59 21.8 42 17.3 46 17.7 31 11.5 Notes payable bank short-term Accounts payable - trade Income taxes payable Accrued bonuses 5 2.1 6 2.3 7 2.6 10 4.1 11 4.2 12 Total current liabilities 138 56.8 131 50.4 109 Subordinated debt - officers 48 19.8 58 22.3 67 24.8 Total liabilities 186 76.5 189 72.7 176 65.2 Net Worth 2 0.8 Common stock 2. 0.8 2 0.7 55 22.6 Retained earings 69 26.5 92 34.1 57 23.5 71 27.3 94 Total net worth 34.8 100.0 $243 $260 100.0 $270 100.0 Total liabilities and net worth $918 $113 112 $933 $919 ($631) $ 72 67 $ 31 40 (S 15) ($662) ($641) (9228) $ 12 11 ($229) ($227) $ 5 ($ 0) $ 5 $ 5 ($ 17) $ 7 6 Dry Supply UCA Cash Flow Worksheet Dry Supply UCA Cash Flow Worksheet for 20xy ($ in $000s) S937 20xy net sales + 20xx accounts receivable $109 - 20xy accounts receivable 113 + Accounts receivable (increase) decrease ($ 4) Cash from sales 20xy cost of goods sold (net of depreciation) ($667) + 20xx inventory $ 73 20xy inventory 72 Inventory (increase) decrease $ 1 + 20xy accounts payable $ 46 20xx accounts payable 42 Accounts payable increase (decrease) $ 4 - Cash production costs 20xy selling, gen. & admin. exp. (net of deprec.) ($230) + 2Oxy accrued expenses $ 11 - 20xx accrued expenses 10 + Accrued expenses increase (decrease) $ 1 - Cash operating expenses 20xy other income $ 5 20xy other expenses (S_0) - Total miscellaneous 20xz income tax expense ($ 12) +20xy income taxes payable $ 6 - 20xx income taxes payable + Income taxes payable increase (decrease) $_1 =Cash paid for taxes NET CASH AFTER OPERATIONS 20xy interest expense ($ 7) 20xy dividends or distributions 0 = Financing costs = Net cash income - 20xx CMLTD CASH AFTER DEBT AMORTIZATION 20xy depreciation expense ($ 12) + 20xx net fixed assets $ 45 - 20xy net fixed assets (49) + Other current assets (increase) decrease ( S4) = Capital expenditures ($ 16) + 20xx investments (CSVLI) 13 - 20xy investments (CSVLI) 14) = Total long-term investments FINANCING SURPLUS (REQUIREMENT) - 20xx notes payable bank short-term ($ 81) + 20xy notes payable bank short-term 68 + Short-term debt increase (decrease) ($ 13) + 20xy CMLTD $ 0 + 20xy long-term debt 58 - 20xx long-term debt (48) + Incremental long-term debt $ 10 20xx stockholders equity (excl. ret. earnings) ($ 2) +20xy stockholders equity (excl. ret, earnings) 2 + stockholders equity increase (decrease) TOTAL EXTERNAL FINANCING CASH AFTER EXTERNAL FINANCING ($ 11) S 36 ($ 16) $ 40 ($ 11) 0 $ 29 (S 7) $ 29 ($ 0) $ 29 ($ 0) $ 29 ($ 13) $ 49 (53) (4) ($ 17) 14 (16) ($ 17) $ 12 ($ 19 $ 10 ($ 68) 59 (S 9) $ 0 67 (58) $9 ($ 2) $ 0 $ 0 ($ 3) $ 9 $0 $ 10