Wyland Consulting, a firm started three years ago by Reyna Wyland, offers consulting services for material handling and plant layout. Its balance sheet at the close of 2018 is as follows.

Earlier in the year Wyland obtained a bank loan of $30,000 cash for the firm. One of the provisions of the loan is that the year-end debt-to-equity ratio (ratio of total liabilities to total equity) cannot exceed 1.0. Based on the above balance sheet, the ratio at the end of 2018 is 1.08. Wyland is concerned about being in violation of the loan agreement and requests assistance in reviewing the situation. Wyland believes that she might have overlooked some items at year-end. Discussions with Wyland reveal the following.

1. On January 1, 2018, the firm paid a $4,500 insurance premium for 2 years of coverage; the amount in Prepaid Insurance has not yet been adjusted.

2. Depreciation on the equipment should be 10% of cost per year; the company inadvertently recorded 15% for 2018.

3. Interest on the bank loan has been paid through the end of 2018.

4. The firm concluded a major consulting engagement in December, doing a plant layout analysis for a new factory. The $6,000 fee has not been billed or recorded in the accounts.

5. On December 1, 2018, the firm received an $11,300 advance payment from Croy Corporation for consulting services to be rendered over a 2-month period. This payment was credited to the Contract Liabilities account. One-half of this fee was earned by December 31, 2018.

6. Supplies costing $4,800 were available on December 3 1; the company has made no entry in the accounts.

REQUIRED:

a. What portion of the company is financed by debt versus equity (called the debt-to-equity ratio and defined in Chapter 1) at December 31, 2018?

b. Is the firm in violation of its loan agreement? Prepare computations to support the correct total liabilities and total equity figures at December 31, 2018.

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WYLAND CONSULTING Balance Sheet December 31, 2018 Assets Liabilities Notes payable.... Accounts payable... Cash.... $ 3,400 $30,000 Accounts receivable... 22,875 4,200 Supplies.... 13,200 Contract liabilities. 11,300 Prepaid insurance. 4,500 Wages payable... 400 Equipment $68,500 Total liabilities.... 45,900 ..... Less: accumulated depreciation 23,975 44,525 Equity Common stock. ... 8,000 Retained earnings 34,600 Total assets $88,500 Total liabilities and equity.. $88,500 ..... .. .... ....