LO3 MA3-65. Analyzing Transactions, Impacts on Financial Ratios, and Loan Covenants Kadous Consultin

LO3 MA3-65. Analyzing Transactions, Impacts on Financial Ratios, and Loan Covenants Kadous Consulting, a firm started three years ago by K. Kadous, offers consulting services for mate- rial handling and plant layout. Its balance sheet at the close of the current year follows. KADOUS CONSULTING Balance Sheet December 31 Assets Cash……………………. Accounts receivable………… Supplies ..HILL Prepaid insurance………….. Equipment, gross………….. Less: Accumulated ……………… Equipment, net……………. Total assets, LLLLLLLLLLL Liabilities $ 3,400 Notes payable ……………… $30,000 20,875 Accounts payable…. . 4,200 13,200 Unearned consulting fees …….. 11,300 6,500 Wages payable… 400 68,500 Total liabilities…….. … . 45,900 Equity 23,975 Common stock. ………….. 8,000 44,525 Retained earnings ….. . . 34,600 $88,500 Total liabilities and equity……… $88,500 Earlier in the year, Kadous obtained a bank loan of $30,000 cash for the firm. A provision of the loan is that the year-end debt-to-equity ratio (total liabilities to total equity) cannot exceed 1.0. Based on the above balance sheet, the ratio at December 31 of this year is 1.08. Kadous is concerned about being in violation of the loan agreement and requests assistance in reviewing the situation. Kadous believes she might have overlooked some items at year-end. Discussions with Kadous reveal the following. 1. On January 1 of this year, the firm paid a $6,500 insurance premium for two years of coverage; the amount in prepaid insurance has not yet been adjusted. 2. Depreciation on equipment should be 10% of cost per year; the company inadvertently recorded 15% for this year. 3. Interest on the bank loan has been paid through the end of this year. 4. The firm concluded a major consulting engagement in December, doing a plant layout analysis for a new factory. The $8,000 fee has not been billed or recorded in the accounts. 5. On December 1 of this year, the firm received an $11,300 cash advance payment from Dichev Corp. for consulting services to be rendered over a two-month period. This payment was credited to the unearned consulting fees account. One-half of this fee was earned but unrecorded by Do- cember 31 of this year. 6. Supplies costing $4,800 were available on December 31; the company has made no adjustment of its Supplies account. Required a. What is the correct debt-to-equity ratio at December 31? b. Is the firm in violation of its loan agreement? Prepare computations to support the correct total liabilities and total equity figures at December 31.

"We Offer Paper Writing Services on all Disciplines, Make an Order Now and we will be Glad to Help"