Question

Scrubber, Inc, presented the following information in a note to its financial statements for the year ending December 31, 2016.

The company has a loan agreement with Mountain State Bank that states:

1. The current ratio should remain at least 2.0 to 1 at all times.

2. The debt-to-equity ration should not exceed .7 to 1 at any times.

3. The company must maintain $75,000 cash at all times.

The ratios at year-end are: current ratio, 2.3. to 1 and debt-to-equity ratio, .2 to 1. The amount of cash on the bank statement is $75,400, but the cash account after the adjustments from the bank reconciliation has a balance of $74,900. Has Scrubber violated its loan agreement?

a. No

b. Yes, the cash balance is less than $75,000

c. Yes, the current ratio is .3 or 30% larger than the agreement indicates.

d. Yes, the cash balance is less than $75,000, and the debt-to-equity ratio is overstated.

Answer 1

Yes, the cash balance is less than $75,000

Step-by-step explanation:

a. b

Current ratio is more than required : No violation

Debt to equity ratio is less than stated: No violation

Cash balance as per books exceed 75000 but as per bank book less: violation

(As per bank reco the amount is different as company may not recorded bank charges and expenses as reflected in bank statement.