Everclean Janitorial Service was started 2 years ago by Lauren Baird. Because business has been exceptionally good, Lauren decided on July 1, 2014, to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Lauren obtained on July 1, 2014, a $25,000, 10% bank loan, payable $10,000 on July 1, 2015, and the balance on July 1, 2016. The terms of the loan require the borrower to have $10,000 more current assets than current liabilities at December 31, 2014. If these terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2014, the accountant for Everclean Janitorial Service prepared the balance sheet shown below. Lauren presented the balance sheet to the bank's loan officer on January 2, 2015, confident that the company had met the terms of the loan. The loan officer was not impressed. She said, "We need financial 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.

(1) Unbilled janitorial services performed were $3,900.

(2) Janitorial supplies on hand were $2,100.

(3) Prepaid insurance was a 3-year policy dated January 1, 2014.

(4) December expenses incurred but unpaid at December 31, $620.

(5) Interest on the bank loan was not recorded.

(6) 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, 2014. Depreciation for 2014 was $2,000 for cleaning equipment and $5,000 for delivery trucks.

Instructions

With the class divided into groups, answer the following.

(a) Prepare a correct balance sheet.

(b) Were the terms of the bank loan met?Explain.

Transcribed Image Text:

Everclean Janitorial Service Balance Sheet December 31, 2014 Assets Liabilities and Stockholders' Equit Current assets Current liabilitics 5,500 9,000 5,200 4,800 Long-term liability Accounts reccivable Janitorial supplies Prepaid insurance Notes payable Accounts payable $10,000 1,500 11,500 Total current liabilitics Total current assets 24,500 Notes payable 15,000 26,500 Property, plant, and equipment Total liabilities Cleaning equipment (net) Delivery trucks (net) 22,000 Stockholders' equity 34,000 Common stock Retained carnings 30,000 24,000 Total property, plant, and equipment Total assets 56,000 $80,500 Total liabilities and stockholders' equity $80,500