Question
On May 1, 2020, Christina Fashions borrowed $92,000 at a bank by signing a four-year, 6% loan. The terms of the loan require equal principal
On May 1, 2020, Christina Fashions borrowed $92,000 at a bank by signing a four-year, 6% loan. The terms of the loan require equal principal payments of $23,000 and accrued interest at 6% due annually on April 30. The loan agreement requires the company to maintain a minimum current ratio of 2.0. The December 31, 2020, year-end statement of financial position, immediately prior to the reclassification of long-term debt, follows:
Current assets | $120,000 | Current liabilities | $50,000 | |||
Non-current assets | 177,000 | Loan payable | 92,000 | |||
Common shares | 80,000 | |||||
Retained earnings | 75,000 | |||||
Total assets | $297,000 | Total liabilities and shareholders equity | $297,000 |
1.Prepare journal entries to record the interest payable on December 31, 2020.
Account Titles and Explanation | Debit | Credit |
2.Prepare the journal entries to reclassify the portion of the long-term loan as current.
Account Titles and Explanation | Debit | Credit |
Does Christina Fashions breach the banks current ratio requirement after preparing the journal entries above? (Round answer to 2 decimal places.)
Current ratio |
Christina Fashions does not meetmeets the banks minimum current ratio. |
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