Question
Braydon Corp is a Canadian privately held company that manufactures frozen food products, which are sold to retailers North America. The shares of this company
Braydon Corp is a Canadian privately held company that manufactures frozen food products, which are sold to retailers North America. The shares of this company are held by 12 individuals, some of them relayed, some of them not. Four of these shareholders are actively involved in the management of the company and are compensated with bonuses based on earnings. There are annual dividend payouts to provide some return to the remaining shareholders. The company has been prosperous in the past but the current retail grocery market, slowly being taken over by several strong competitors, is providing a challenge for Braydon.
The VP Finance has come to you, a staff accountant, for advice on two key financial ratios (Exhibit 1) based on the draft statement of financial position (Exhibits 2) for the most recent fiscal year. She has isolated these ratios because they are the subject of loan covenants. Specifically, one chartered bank provides the $6 million financing that appears as long- term debt on the statement of financial position(SFP). As part of this lending agreement, the current ratio must not go above 12:1.If either of these ratio requirements is violated, the debt becomes payable on demand. The current ratio condition is not met in the financial statements, although it is very close. The VP Finance suspects that the draft SFP will change based on the additional information she has provided to you (Exhibit 2). Braydon Corp. has a tax rate of 40%
Requirements:
1) Please analyze the additional information (Exhibit 2) and provide a revised SFP.
2) Provide a revised calculation of both ratios, and comment on the ratio compliance.
3) You must include all necessary calculations/adjusting entries to accompany the revised SFP. For each calculation or adjusting entry you have made, be sure to include a note to explain your reasoning.
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