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.)									Amount $
		Assets		=	Liabilities		+	Stockholder's Equity
	1	Cash	12,000					Common Stock	12,000
	2	Cash	30,000		Long Term Note Payable	30,000
	3	Equipment	40,000		Short Term Note Payable	5,000
		Cash	-35,000
	4	Supplies	900		Accounts Payable	900
	Totals		47,900			35,900			12,000

2.)	Business Sim Corp.
	Balance Sheet
	At September 30
	Assets	Amount $	Liabilities	Amount $
	Current Assets		Current Liabilities
	Cash ( 12,000 + 30,000 - 35,000 )	7,000	Short Term Note Payable	5,000
	Supplies	900	Accounts Payable	900
	Total Current Assets	7,900	Total Current Liabilities	5,900
	Non- Current Assets		Non-Current Liabilities
	Equipment	40,000	Long Term Note Payable	30,000
			Stockholder's Equity
			Common Stock	12,000
			Retained earnings	-
	Total Assets	47,900	Total Liabilities & Stockholder's Equity	47,900

3.)		Current Ratio		$
	Numerator	Current Assets	=	7,900	=	1.34
	Denominator	Current Liabilities		5,900

Yes ,BSC is complying with its loan covenant.