Reference no: EM131771120

Jenny Pike, assistant accountant for Blenheim Instruments Ltd, was finalising the balance sheet of the company as at 30 June 2015 with the accountant of the business, Russell Bayer. Although both agreed that everything appeared to be in order, Jenny had noticed that a large loan had been taken out by the company with ABB Bank and that, as part of the loan agreement, Blenheim Instruments Ltd was to maintain a ratio of current assets (less inventories) to current liabilities of at least 1.25:1. She was concerned that the company would not be able to maintain this ratio given the fact that she had just learned that two of the company's largest customers had gone into liquidation and there was every likelihood that the company would recover no more than 10% of the debts owing. The current allowance for doubtful debts was grossly inadequate and thus the accounts receivable was overstated.

The relevant figures prepared for the balance sheet showed current assets (less inventories) standing at $1 250 000, and current liabilities stood at $1 000 000. Jenny raised her concerns with Russell Bayer about the overstatement of accounts receivable and not being able to maintain the desired minimum ratio for the purpose of the loan agreement, if the accounts receivable figure was updated. Russell replied: ‘Yes, I can appreciate your concerns. However, we don't know how much will be recovered from the liquidated companies, so let's leave things the way they are. The bank wants only the 30 June figures and, as it is, the ratio will be okay as far as the bank is concerned.' Russell thought about the problem a little further and then explained: ‘We won't have to write off the additional bad debts until next year when they occur and are known with certainty, and by then things will have picked up. I am sure the directors of the company will agree with me, and be happy to leave the accounts as they are, so there is no need for you to worry any more.'

Iam don't really understand the case above, what is it talk about? anybody summary for me please......the ratio and how is it related to the 2 liquidation company?