Stanley Frozen Foods owes the bank $50,000 on a line of credit. Terms of the agreement specify that Stanley must maintain a minimum current ratio of “1.2 to 1”, or the entire outstanding balance becomes immediately due in full. To date, the company has complied with the minimum requirement.
However, management has just learned that a failed warehouse freezer has ruined thousands of dollars of frozen foods inventory. If the company records this loss, its current ratio will drop to approximately “0.8 to 1”.
Whether any or all of this loss may be covered by insurance currently is in dispute and will not be known for at least 90 days - perhaps much longer. There are several reasons why the insurance company may have no liability.
In trying to decide how to deal with the bank, Stanley Frozen Foods management is considering the following options:
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