International Services entered into a debt covenant requiring it to maintain a current ratio of at least 1.5:1. The company’s condensed balance sheet as of December 31 follows. Assets Liabilities and Stockholders* Equity Current assets $ 80,000 Noncurrent assets 200,000 Total assets $ 280,000 Current liabilities Long-term liabilities Stockholders’ equity Total liabilities and stockholders’ equity $ 50,000 100,000 130,000 $280,000 International’s primary customer is Buckingham, Ltd., a company located in Britain, and as of December 31 Buckingham owed International 40,000 British pounds. The exchange rate as of December 31 between U.S. dollars and British pounds was $1.70 per pound. Chapter 6 The Current Asset Classification, Cash, and Accounts Receivable 307 REQUIRED:

a. What dollar amount of International’s current assets on the balance sheet is associated with the receivable owed by Buckingham?

b. Assume that all account balances remain the same over the next year. Below what exchange rate (U.S. dollars per British pound) would International be in violation of the debt covenant?

c. Assume that $1,600 of Accounts Payable on the balance sheet represents a debt to a British bank of 1,000 British pounds. Below what exchange rate would International be in violation of the debt covenant now? Consider both the receivable and the payable.

d. Describe how International could hedge to reduce the risk of being in violation of the debt covenant.