JENNY ROD, INC. Income Statement For the period ended December 31, 2019 (in thousands) P420 Sales (all on account) 290 Cost of goods sold 130 Gross margin Operating expenses: Selling expenses 42 Administrative expenses 68 Total operating expenses 110 Net operating income 20 Interest expense Net income before taxes 20 Less income taxes (30%) 6 Net income P14 Required: 1. Based on the above unaudited financial statements and the statement made by the loan officer, would the company qualify for the loan? Defend your answer. Show necessary computations in good form. 2. Last year Rodie purchased and installed new, more efficient equipment to replace an older plastic injection molding machine. Rodie had originally planned to sell the old machine but found that it is still needed whenever the plastic injection molding process is a bottleneck. When Rodie discussed his cash flow problems with his brother-in-law, he suggested to Rodie that the old machine be sold or at least reclassified as inventory on the balance sheet since it could be readily sold. At present, the machine is carried in the Property and Equipment account and could be sold for its net book value of P45,000. The bank does not require audited financial statements. What advice would you give to Rome concerning the machine? Show necessary computations in good form. Answer (1)Problem 9 Jenny Rod Inc. was founded by Rodie Yad to produce a specialized roller skate he had designed for doing aerial tricks. Up to this point, Rodie has financed the company from his own savings and from retained profits. However, Rodie now faces a cash crisis. In the year just ended, an acute shortage of roller bearings had developed just as the company was beginning production for the Christmas season. Rodie had been assured by the suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers had been unable to fully deliver on this promise. As a consequence, Jenny Rod had large stocks of unfinished skates at the end of the year and had been unable to fill all of the orders that had come in from retailer for the Christmas season. Consequently, sales were below expectations for the year, and Rodie does not have enough cash to pay his creditors. Well before the accounts payable were to become due, Rodie visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Rodie that there should not be any problem getting a loan to pay off his accounts payable - providing that on his most recent financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Rodie promised to return later with a copy of his financial statements. Rodie would like to apply for a P80,000 six-month loan bearing an interest rate of 10% per year. The unaudited financial reports of the company appear below: JENNY ROD, INC. Comparative Balance Sheet As of December 31, 2018 and 2019 (in thousands) Assets 2019 2018 Cash P70 P150 Accounts receivable 50 40 Inventory 160 100 Prepaid expenses 10 12 Total current assets 290 302 Plant and equipment 270 180 Total assets P560 P482 Liabilities and Equity Current liabilities: Accounts payable P154 P90 Accrued payables 10 10 Total current liabilities 164 100 Long-term liabilities Total liabilities 164 100 Stockholders' Equity Ordinary shares and additional paid-in capital 100 100 Retained earnings 296 282 Total stockholders' equity 396 Total liabilities and stockholders' equity 382 P560 P482