Tor's Party & Rentals (TPR) is a party and novelty store located just north of Windsor. TPR is a private company, and was founded in 2008 by Amanda Harkings. TPR sells all kinds of party needs, from balloons to loot bags, and from gift wrap to food items. TPR also sells party supplies for special holiday occasions and huge sporting events. TPR has a party room on location that can be booked for parties and other special events. TPR has a December 31 year end and operates by using a fairly simple accounting structure. Jessica Altooze has been the bookkeeper for TPR since it opened in 2008 and has been diligent in recording the journal entries and preparing the year-end financial statements. In November 2020, Jessica won the lottery and immediately retired from the bookkeeping business and moved to South Carolina. This left Amanda on her own and without any real skills in accounting. Amanda immediately asked her auditor for someone with an accounting background to help her and you were hired as a result.

TPR had one major creditor at the beginning of 2020. One of the major banks loaned TPR $500,000 for ongoing operating costs. The outstanding portion of the loan was $400,000 at the beginning of the year. The bank requires TPR to maintain a current ratio of 1.8:1 or the loan may become immediately repayable. It also requires TPR to have a debt to total asset ratio of no greater than 55%.

Adjusting Journal Entries

Information required for adjusting journal entries:

• There is no interest accrual required for the mortgage loan on the building because payment was made on December 31. The loan for the balloon machine carries an interest rate of 5% and has been outstanding for 15 days.
• Depreciation of $800 on the cash register machines and $15,000 on the other equipment has not yet been recorded.
• A dividend of $2,000 was declared but has not been recorded. It will be paid in March 2021.
• The monthly electricity bill of $2,000 was received in early January 2021. This bill is for the month of December 2020.
• Income tax expense of $27,000 is estimated as the payable.
• Only 40% of the prepaid insurance amount related to 2020.
• The lawyer's invoice for $800 for services performed in December 2020 was received in early January 2021.
• Salaries that related to December 31, 2020, and not paid by the year end amounted to $12,000.

Not all 2020 year-end journal entries have been made yet, but any unrecorded adjusting journal entries can be found inExhibit II.

Required:

Prep. a short memo to Amanda that addresses any concerns you have, specifically with respect to the covenants attached to the loan.