Question

Business Sim Corp. (BSC) issued 1,000 common shares to Kelly in exchange for $12,000. BSC borrowed $30,000 from the bank, promising to repay it in two years. BSC purchased computer equipment for $40,000, signing a six-month note for $5,000, and paying the balance with check number 101. BSC received $900 of supplies purchased on account. BSC’s loan contains a clause (“covenant”) that requires BSC to maintain a ratio of current assets to current liabilities of at least 1.3.

Calculate the current ratio of BSC.

	Current Ratio Numerator = = Denominator

Whether BSC is complying with or violating its loan covenant.

	BSC is loan covenant.

Answer 1

Solution:

Current asset of BSC = Cash + Supplies = ($12,000 + $30,000 - $35,000) + $900 = $7,900

Current liabilities of BSC = Notes payable + accounts payable = $5,000 + $900 = $5,900

Current ratio = Current assets / Current liabilities = $7,900 / $5,900 = 1.34

Yes, BSC is complying with loan covenant.