Assets at12/31/03 Liabilities at 12/31/03
Cash $ 200 Short-term tradepayables $ 500
Short-term trade receivables 600 Note payable toCEO, due 8/31/04 (2) 350
Inventories 700 Wagespayable 100
Prepaid warehouse rentals (1)300 Customeradvances(3) 150
Property & equipment, net 900 Income taxespayable 50
Totalassets $2,700 Bonds payable, due 2004-11 (4) 800
Totalliabilities $1,950
Notes:
1. Prepaid warehouse rentals cover the period1/1/04-12/31/05.
2. Following a plan adopted on 12/31/03, the Companyborrowed $350 from the bank on 1/15/04, giving a 10% note payabledue on 8/31/05 in exchange, and used the proceeds from this loan torepay the 8/31/04 note payable.
3. Customer advances are for goods to be deliveredduring 2004.
4. Bonds payable are due in annual increments of$100, beginning on 12/31/04 and ending on 12/31/11.
Shown above is a complete listing of Zed Corp.’s assets andliabilities at December 31, 2003. Zed’s 12/31/03 balance sheet willbe issued to shareholders and the SEC on or about 1/31/04.
In its contract with bondholders, Zed promises, while the bondsare outstanding, to maintain:
a. a current ratio nosmaller than 1.75;
b. working capital nosmaller than $500;
c. a ratio of totalliabilities to total stockholders’ equity no greater than 3.00;and
d. a ratio of noncurrentliabilities to total assets no greater than 0.40.
Bondholders may declare the bonds immediately due and payable ifZed violates one or more of these contract provisions.
Are Zed’s 12/31/03 balance sheet relationships in compliancewith the terms of the company’s contract with bondholders? Supportyour answer with a detailed calculation of total current assets,total current liabilities, and each of the balance sheetrelationships in (a)-(d) above.
