Question BYP4-5

White gloves Janitorial Service was started 2 years ago by Jenna Olson. Because business has been

exceptionally good, Jenna decided on July 1, 2017, to expand operations by acquiring an additional truck

and hiring two more assistants. To finance the expansion, Jenna obtained on July 1, 2017, a $25,000, 10%

bank loan, payable $10,000 on July 1, 2018, and the balance on July 1, 2019. The terms of the loan require

the borrower to have $10,000 more current assets than current liabilities at December 31, 2017. If these

terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2017, the accountant

for White gloves Janitorial Service Inc. prepared the balance sheet shown below.

Jenna presented the balance sheet to the banks loan officer on January 2, 2018, 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 Certified Public Accountant. A Certified Public Accountant 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 $3,700.

2. Janitorial supplies on hand were $2,500.

3. Prepaid insurance was a 3-year policy dated January 1, 2017.

4. December expenses incurred but unpaid at December 31, $500.

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, 2017. Depreciation for 2017 was $2,000 for

cleaning equipment and $5,000 for delivery trucks.

Prepare a correct balance sheet. Were the terms of the bank loan met?