Requires- All Journal Entries

The VP of Finance has come to you, an Accounting Intern, for advice on two key financial ratios (Exhibit 1) based on the draft statement of financial position (Exhibit 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 financings that appear as long-term debt on the statement of financial position. As a part of this lending agreement, the current ratio on audited financial statements must not go below 2:1, and the debt-to-equity 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 of Finance suspects that the draft financial statements will change based on the additional information she has provided to you (Exhibit 2). Your task is to analyze this additional information and restate the ratios, providing any advice you feel is appropriate. You should also attach a copy of the revised statement of financial position and all supporting calculations and adjusting entries. Required: Prepare a report to the VP of Finance that responds to her concerns. The tax rate is 40%. Ratio Current ratio Debt to equity ratio Exhibit 1: Senera Corp Debt Covenant Ratios Definition Ratios (Based on Draft Statement) Current assets/Current liabilities $2.360/S1.211 1.95 Total liabilities/Total owners' equity $8.808/5867 10.16 Exhibit 2: Senera Corp. Draft Statement of Financial Position as of December 31, 2021 (in thousands) Assets Current assets: Cash $300 Accounts receivable $1.443 Allowance for doubtful accounts (12) 1.431 Inventory 533 Prepaid expenses 96 Total current assets $2,360 Capital assets: Property, plant, and equipment 7,293 Other assets 22 Total assets 59.675 Liabilities Current liabilities: Bank indebtedness Accounts payable and accrued liabilities $405 576 284 Current portion of long-term debt 230 Total current liabilities 1,211 Long-term liabilities: Secured bank debt, 6% 1,442 Secured bank debt, floating interest rate 6,000 Deferred tax 155 Total liabilities 8,808 Owners' Equity Common share capital 583 Retained camings Total owners' equity 867 Total liabilities and owners' equity $9.675 Additional Information (all amounts in thousands) 1. At year-end, there was a balance of $22 in the cash account in the general ledger, a $300 bank balance less $278 in outstanding cheques. On the statement of financial position, cash was shown as the balance before outstanding cheques and cheques were classified as accounts payable. 2. In 2021, certain accounts receivable was transferred to a financial institution on a non-recourse basis. The transfer was accounted for as a sale of accounts receivable with Senera retaining the right to repurchase the receivables and use them as collateral against the 6% bank loan. Servicing of the accounts receivable is done by Senera on a fee-for-service basis. At the end of the year, $210 of accounts receivable had been transferred. Senera recognized a loss of $1.9. This was felt to be an accurate representation of the doubtful accounts in this account receivable population. 3. Of the remaining accounts receivable, S412 is receivable from one grocery chain, which is wholly owned by a shareholder of Senera. This account has been outstanding for some time, but Senera has had the shareholder personally pledge his share investment in Senera as security in the event of non-payment. Activity in the account this fiscal year: Opening balance $256 Sales 455 Payments on account (341) Interest accrued 42 Closing balance $412 *of this amount, the S42 interest and S106 of sales are current, and the remainder is 90+ days past due. 4. The allowance for doubtful accounts has not yet been addressed in the year-end financial statements. An aging of accounts receivable shows the following: Status Amount of accounts receivable Percentage Uncollectible Current $ 424 9% 30 days past due 8% 231 10% 60 days past due 580 40% 90 days past due Total $1,443 208