(b) Focaccia Ltd has an Accounts Receivable balance of $20,000,000. The current downturn in the economy suggests the provision for doubtful debts needs re-consideration. The provision for doubtful debts before any adjustment is $100,000.The Financial Accountant estimates the provision for doubtful debts to be $3,000,000. The CFO however estimates the provision to be $2,000,000.

Required:

Focaccia Ltd has two debt covenants included in its loan contract from its banker. It must maintain a current asset ratio of 2.5:1 and an interest coverage ratio of 4:1. If Focaccia Ltd is close to breaching its debt covenants which provision for doubtful debts would Focaccia Ltd's management prefer?