Business Sim Corp. (BSC) issued 1,000 common shares to Kelly in exchange for $ 12,000. BSC borrowed $ 30,000 from the bank, promising to repay it in two years. BSC paid $ 35,000 for computer equipment with check number 101 and signed a note for $ 5,000 due in six months. BSC received $ 900 of supplies purchased on account. BSC’s loan contains a clause (“covenant”) that requires BSC to maintain a ratio of current assets to current liabilities of at least 1.3.
Required:
1. Identify the transactions and analyze their accounting equation effects, using the format shown in the chapter.
2. Prepare journal entries for the transactions described above and post them to T- accounts.
3. Assuming BSC entered into no other activities during its first year ended September 30, pre-pare the company’s classified balance sheet. Include a balance of zero in Retained Earnings.
4. Determine and explain whether BSC is complying with or violating its loan covenant.