Acme's bank loan must be immediately repaid in full if Acme's earnings fall below $1 million per year. If Acme has to...

Ryan-Mahabir on December 17, 2019

Why is A correct? Why is D incorrect?


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Skylar on December 21, 2019

@Ryan-Mahabir, happy to help!

The passage tells us that Acme must repay its loan fully and declare bankruptcy if its earnings fall below $1 million per year. Acme has been reporting "annual earning of WELL OVER $1 million each year," but admitted that it overstated its earnings for last year. Based on this, the passage concludes that Acme will have to declare bankruptcy.

Notice that the passage does not say how much Acme overstated their earnings. Did they claim to have earned $2 million (which is "well over $1 million") but only earn $1.5 million? This would be an overstatement, but not a violation of the bank loan that would require repayment and bankruptcy. However, if Acme had claimed to have $1.5 million but overstated by more than $0.5 million, then earnings would be below $1 million and Acme would need to repay the loan and declare bankruptcy. The conclusion of the passage describes this second scenario, so the correct answer choice will clarify this assumption- that the real earnings violated the loan terms and were below $1 million. (A) is correct because it does this.

(D) is incorrect because it discusses "the current year," whereas the passage is only concerned with past years and "last year" specifically. If Acme's earning already fell below $1 million in the last year, then the loan must be repaid and bankruptcy must be declared regardless of the current year's earnings.

Does this make sense? Please reach out with any other questions!