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.

Identify the transactions and analyze their accounting equation effects.

Assuming BSC entered into no other activities during its first year ended September 30, prepare the company’s classified balance sheet. Include a balance of zero in Retained Earnings.

Calculate the current ratio of BSC.

Whether BSC is complying with or violating its loan covenant.

Assets Liabilities Stockholders' Equity 1 2 3 4 Totals BUSINESS SIM CORP. Balance Sheet At September 30 Assets Liabilities Current Assets Cash Supplies $ 5,000 900 Total Current Assets 5,900 0 0 $ 5,900 $ 0 Current Ratio Numerator 11 = Denominator

Answer 1

1. Equation

Il + S.No. Assets Liabilites Stockholder's Equity 1 Cash $12000 + Common Stock $12,000 2 Cash $30,000 = Notes Payable (Bank Loan) $30,000 + 3 Computer Equipment $40,000/= Cash ($35,000) = Notes Payable (Short term) $5,000 + 4 Supplies $900 = Accounts Payable $900 + Totals $47,900 = $35,900 $12,000 +

2. Balance Sheet

Assets Current Assets: Cash Supplies Total Current Assets Property, Plant and Equipment Computer Equipment BUSINESS SIM CORP. Balance Sheet Liabilities and Stockholder's Equity Current Liabilities: $ 7,000 Accounts Payable $ 900 900 Notes Payable 5,000 7,900 Total Current Liabilities 5,900 Long-term Liabilities 40,000 Notes Payable (Bank Loan) 30,000 Total Liabilities 35,900 Stockholder's Equity Common Stock 12,000 Retained Earnings 0 Total Stockholder's Equity 12,000 $ 47900 Total Liabilities & Stockholder's Equity $ 47900 Total Assets

3. Current Ratio

Current Assets Numerator Current Assets Denominator Current Liabilities $7,900 $5,900 1.34

Yes, BSC is complying with its loan covenant. Because, company has current assets 1.34 which satisfied the requirement of loan covenant.

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