Value Corp. was started 2 years ago. Because business was exceptionally good, ma
ID: 2458575 • Letter: V
Question
Value Corp. was started 2 years ago. Because business was exceptionally good, management decided on July 1, 2012 to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Management obtained on July 1, 2002, a $25,000 10% bank loan, payable $10,000 on July 1,2013, and the balance on July 1, 2014. The terms of the loan require the borrower to have $10,000 more current assets than current liabilities at December 31, 2012. If these terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2012, the accountant for Value Corp prepared the balance sheet shown below. Management presented the balance sheet to the bank's loan officer on January 2, 2013, confident that the company had met the terms of the loan. The loan officer was not impressed. She said: "We needfinancial statements audited by a CPA." A CPA was hired and immediately realized that the balance sheet had been prepared from a trial balance and not from an adjusted trial balance. The adjustment data at the balance sheet date consisted of the following. Earned but unbilled janitorial services were $3,700. Janitorial supplies on hand were $2,500. Prepaid insurance was a 3-year policy dated January 1, 2012. December expenses incurred but unpaid at December 31, $500. Interest on the bank loan was not recorded. The amounts for property, plant and equipment presented in the balance sheet were reported net of accumulated depreciation (cost less accumulated depreciation). These amounts were $4,000 for cleaning equipment and $5,000 for delivery trucks as of January 1, 2012. Depreciation for 2012 was $2,000 for cleaning equipment and $5,000 for delivery trucks. Prepare a correct balance sheet. Were the terms of the bank loan met? Explain.Explanation / Answer
Solution - To prepare the correct Balance sheet lets consider the below Journal entries
a) Below is the adjusted Balance sheet
Working for Capital adjusted
b)
Yes the term of bank loan met as the asset is more than liabilities by over $10000
Dr Cr 1 Accouts receivable 3700 Enearned revenue 3700 2 Cost of Goods Sold 2700 Janitorial Supplies 2700 3 Insurance Expense 1600 Prepaid Insurance 1600 4 Expenses incurred 500 Accounts Payable 500 5 Accrued Interest Expense 1250 Interes tPayable 1250 6 Depreciation Expenses 7000 Accumulated Depreciation - Cleaning Equipment 2000 Accumulated Depreciation - Delivery Truck 5000Related Questions
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