The adjusted trial balance for the year of Balsamo Corporation at May 31, 2018, follows.

1. Prepare Balsamo Corporation's 2018 single-step income statement, statement of retained earnings, and balance sheet.

2. Balsamo's lenders require that the company maintain a debt ratio no higher than 0.50. Calculate Balsamo's debt ratio at May 31, 2018, to determine whether the company is in compliance with this debt restriction. If not, suggest a way that Balsamo could have avoided this difficult situation.

Credit Balsamo Corporation Adjusted Trial Balance May 31, 2018 Account Debit Cash 19,000 Accounts receivable 19,500 Supplies 2,400 Prepaid rent 1,400 Equipment 36,700 Accumulated depreciation equipment Accounts payable 4,800 9,300 900 Interest payable Unearned service revenue 200 Income tax payable 2,500 18,900 Note payable Common stock 10,000 5,000 Retained earnings Dividends 9,000 105,300 Service revenue Depreciation expense-equipment 1,400 Salary expense Rent expense 40,100 11,100 3,000 Interest expense Insurance expense 4,100 Supplies expense 2,300 6,900 Income tax expense 156,900 $ 156,900 Total