Kadous Consulting, a firm started three years ago by K. Kadous, offers consulting services for material handling and plant layout. Its balance sheet at the close of 2010 follows.

Earlier in the year Kadous obtained a bank loan of \(\$ 30,000\) cash for the firm. A provision of the loan is that the year-end debt-to-equity ratio (total liabilities to total equity) cannot exceed 1.0. Based on the above balance sheet, the ratio at the end of 2010 is 1.08 . Kadous is concerned about being in violation of the loan agreement and requests assistance in reviewing the situation. Kadous believes that she might have overlooked some items at year-end. Discussions with Kadous reveal the following.
1. On January 1,2010 , the firm paid a \(\$ 4,500\) insurance premium for two years of coverage; the amount in Prepaid Insurance has not yet been adjusted.
2. Depreciation on equipment should be \(10 \%\) of cost per year; it inadvertently recorded \(15 \%\) for 2010 .
3. Interest on the bank loan has been paid through the end of 2010 .
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 1,2010, the firm received an \(\$ 11,300\) cash advance payment from Dichev Corp. for consulting services to be rendered over a two-month period. This payment was credited to the Unearned Consulting Fees account. One-half of this fee was earned but unrecorded by December 31, 2010 .
6. Supplies costing \(\$ 4,800\) were available on December 31 ; the company has made no adjustment of its Supplies account.
\section*{Required}
a. What is the correct debt-to-equity ratio at December 31,2010 ?
\(b\). Is the firm in violation of its loan agreement? Prepare computations to support the correct total liabilities and total equity figures at December 31, 2010.

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KADOUS CONSULTING Balance Sheet December 31, 2010 Cash... Accounts receivable..... Assets $ 3,400 Notes payable Liabilities $30,000 Supplies .... 22,875 Accounts payable... 13,200 Unearned consulting fees 4,200 11,300 Prepaid insurance.. 4,500 Wages payable... 400 Equipment. $68,500 Total liabilities... 45,900 Less: Accumulated Equity depreciation 23,975 44.525 Common stock. 8,000 Retained earnings 34,600 Total assets. $88,500 Total liabilities and equity. $88,500