AFM391 Lecture Notes - Lecture 1: Write-Off, Promissory Note, Accrual

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Hot tub galleria (htg) is a small private company that relies on debt financing to. They are facing many accounting issues at the moment. Recently, htg is seeking for an additional financing from a bank for 1. 5 million face value and at a discount rate of 9%, interest payable annually. In order to acquire this financing, the bank requires a debt to equity ratio of 1:1. Currently, htg is at debt to equity ratio of 1:2. 4 or 41. 67%, implying that they need to increase their debt or decrease their equity to match the required ratio. Furthermore, htg follows aspe to record transactions and report financial statements. Warranty during the year and recorded it on cash basis. We believe that this is not the correct method to use to record these and that htg should use the accrual basis of accounting. Since the warranties are sold separately, the service type approach would be the ideal method.

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