White gloves Janitorial Service was started 2 years ago by Nancy Kohl. Because business has been exceptionally good, Nancy decided on July 1, 2010, to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Nancy obtained on July 1, 2010, a $25,000, 10% bank loan, payable $10,000 on July 1, 2011, and the balance on July 1, 2012. The terms of the loan require the borrower to have $10,000 more current assets than current liabilities at December 31, 2010. If these terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2010, the accountant for White gloves Janitorial Service Inc. prepared the balance sheet shown on page 195. Nancy presented the balance sheet to the bank's loan officer on January 2, 2011, 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, 2010.

(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, 2010. Depreciation for 2010 was $2,000 for cleaning equipment and $5,000 for delivery trucks.

InstructionsWith the class divided into groups, answer the following.(a) Prepare a correct balance sheet.(b) Were the terms of the bank loan met? Explain.

WHITEGLOVES JANITORIAL SERVICE Balance Sheet December 31, 2010 Liabilities and Owner's Equity Assets Current liabilities Notes payable Accounts payable Total current liabilities Long-term liability Notes payable Total liabilities Owner's equity Nancy Kohl, Capital Current assets Cash Accounts receivable Janitorial supplies Prepaid insurance Total current assets Property, plant. and equipment Cleaning equipment (net) Delivery trucks (net) Tota property, plant, and equipment Total assets $ 6,500 $10,000 9,000 5,200 4,800 12.500 15.000 25,500 27.500 22,000 34,000 54,000 56,000 Total liabilities and owner's equity $81.500 $81.500