Sail New England told you that the under-absorbed overhead was from excessive actual overhead costs caused by a spy from their chief competitor, New York Boating, who was sabotaging their manufacturing equipment. The spy was caught and Sail New England just won a lawsuit against New York Boating. However, the controversy caused demand for their product to decline to the point that they won’t be able to sell what is left in inventory (which is most of their assets) to normal customers.
The outcome of the lawsuit requires New York Boating to purchase all of Sail New England’s products next year, but not actually pay for it for 3 years. Their accountant says that the result technically increased reported income this year and next year for Sail New England (over $1 million each year, compared to $700,000 originally reported this year), even though their operating cashflow will be negative in both years. Your in-house lawyer explained that New York Boating will probably go bankrupt and never pay in 3 years for their required purchases.
Should you renew your $700,000 loan with Sail New England?
Yes or No?
Sail New England wants to borrow an additional $300,000. Should you lend it?
Yes or No?
Explain your reasoning for your decision related to the $300,000 loan request.