You are one of the accountantsat Grace Manufacturing Company. Grace has a $50 million loan with LoneStar Bank. One of the stipulations on the loan is that Grace must have acurrent ratio of 1.5. In other words, Grace’s current assets must be atleast one and one-half of the current liabilities. Based on thepreliminary financial statements for the year just ended, Grace willviolate the stipulation. Violation will negatively affect current andfuture loans. The accounting staff has identified two options to fix theproblem, which include:Reclassifying “long-term investments” as“short-term investments” Doing this would require a statement frommanagement that the intention is to sell the property within one year.Actually, Grace intends to hold the investment for several years, andthe classification would be changed back to long-term next year when thethreat of loan violation has disappeared.Reclassifying certainshort-term loans as long-term on the basis that Grace will refinance theloans. Technically, this is true. However, Grace has no formalrefinancing commitment and will not have one until at least six monthsfrom now.Present the findings ofthe accounting staff to the board of directors. What points will youemphasize in your presentation? What is your recommendation?
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