Whitegloves Janitorial Service was started 2 years ago by Lynn Sanders. Because business has been exceptionally good, Lynn decided on July 1, 2019, to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Lynn obtained on July 1, 2019, a $25,000, 10% bank loan, payable $10,000 on July 1, 2020, and the balance on July 1, 2021. The terms of the loan require the borrower to have $10,000 more current assets than current liabilities at December 31, 2019. If these terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2019, the accountant for Whitegloves Janitorial Service Inc. prepared the following balance sheet.

Lynn presented the balance sheet to the bank's loan officer on January 2, 2020, 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 CPA." A CPA 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, 2019.
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, 2019. Depreciation for 2019 was $2,000 for cleaning equipment and $5,000 for delivery trucks.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a correct balance sheet.
(b) Were the terms of the bank loan met? Explain.

Transcribed Image Text:

WHITEGLOVES JANITORIAL SERVICE Balance Sheet December 31, 2019 Assets Liabilities and Stockholders' Equity Current liabilities Notes payable Current assets Cash Accounts receivable Supplies Prepaid insurance $6,500 9,000 5,200 4,800 $10,000 2,500 Accounts payable Total current liabilities $12,500 Long-term liability $25,500 Notes payable 15,000 27,500 Total current assets Property, plant, and equipment Total liabilities Equipment (net) Delivery trucks (net) 22,000 34,000 Stockholders' equity Common stock Retained earnings 30,000 24,000 Total property, plant, and equipment Total assets Total stockholders' equity 54,000 56,000 $81,500 Ttl liabilities and stockholders' equity $81,500