Whitegloves Janitorial Service was started 2 years ago by Nancy Kohl. Because business has been exceptionally good, Nancy decided on July 1, 2012, to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Nancy obtained on July 1, 2012, a $25,000, 10% bank loan, payable $10,000 on July 1, 2013, and the balance on July 1, 2014. The terms of the loan require the borrower to have $10,000 more current assets than current liabilities at December 31, 2012. If these terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2012, the accountant for Whitegloves Janitorial Service Inc. prepared the balance sheet shown below.

Nancy presented the balance sheet to the bank’s loan officer on January 2, 2013, 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) Earned but unbilled janitorial services were $3,700.

(2) Janitorial supplies on hand were $2,500.

(3) Prepaid insurance was a 3-year policy dated January 1, 2012.

(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, 2012. Depreciation for 2012 was $2,000 for cleaning equipment and $5,000 for delivery trucks.

WHITEGLOVES JANITORIAL SERVICE
Balance Sheet
December 31, 2012
Assets		Liabilities and Owner’s Equity
Current assets		Current liabilities
Cash	$ 6,500	Notes payable	$10,000
Accounts receivable	9,000	Accounts payable	2,500
Janitorial supplies	5,200	Total current liabilities	12,500
Prepaid insurance	4,800	Long-term liability
Total current assets	25,500	Notes payable	15,000
Property, plant, and equipment		Total liabilities	27,500
Cleaning equipment (net)	22,000	Owner’s equity
Delivery trucks (net)	34,000	Owner’s capital	54,000
Total property, plant, and equipment	56,000
Total assets	$81,500	Total liabilities and owner’s equity	$81,500

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.