Business Sim Corp. (BSC) issued 1,500 common shares to Kelly in exchange for $19,000. BSC borrowed $40,000 from the bank, promising to repay it in two years. BSC purchased computer equipment for $51,000, signing a six-month note for $6,000, and paying the balance with check number 101. BSC received $950 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 2.0. Required:
a. 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.
b. Identify the transactions and analyze their accounting equation effects.
c. Prepare journal entries for the transactions described above and post them to T-accounts.
d. Determine and explain whether BSC is complying with or violating its loan covenant.