In late 2014, Bedeque Ltd. (Bedeque) arranged to borrow

\($1,300,000\) from a local bank to provide \($325,000\) in needed working capital and

\($975,000\) to finance the purchase of some new equipment. However, the terms of a previous loan require that the company maintain a current ratio greater than 1.5 and a debt-to-equity ratio of less than 1. If either of these restrictions isn’t met the loan would have to be repaid within 30 days. The previous loan agreement also states that for Bedeque to pay dividends, retained earnings must be greater than \($1,700,000\) after the dividend.

Bedeque’s controller has asked you to figure out how the new loan will affect the restrictions on the December 31, 2014 balance sheet. Bedeque’s shareholders are expecting a dividend in early 2015 so the controller also wants to know how much can be paid. The controller has provided you with a projected balance sheet for December 31, 2014. The balance sheet takes into consideration all expected economic activity through the end of the year (including the closing entry), except for the impact of the new loan.

Required:
Prepare a report that provides the information the controller wants. Explain your findings and reasoning.

Transcribed Image Text:

Bedeque Inc. Projected Balance Sheet as of December 31, 2014 $ 900,000 Current liabilities Current assets Non-current assets 6,562,500 Non-current liabilities Capital stock $ 750,000 1,875,000 2,500,000 Retained earnings 2,337,500 Total liabilities and Total assets $7,462,500 shareholders' equity $7,462,500