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Whitegloves Janitorial Service was started 2 years ago by Nancy Kohl. Because businesshas been exceptionally good, Nancy decided on July 1, 2008, to expand operations by acquiringan additional truck and hiring two more assistants. To finance the expansion, Nancy obtained on July 1, 2008, a $25,000, 10% bank loan, payable $10,000 on July 1, 2009, and the balance on July 1, 2010. The terms of the loan require the borrower to have $10,000 more current assetsthan current liabilities at December 31, 2008. If these terms are not met, the bank loan willbe refinanced at 15% interest. At December 31, 2008, the accountant for Whitegloves JanitorialService Inc. prepared the balance sheet shown at the top of page 190.

Nancy presented the balance sheet to the bank’s loan officer on January 2, 2009, confidentthat 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 realizedthat the balance sheet had been prepared from a trial balance and not from an adjusted trialbalance. 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, 2008.

(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 reportednet of accumulated depreciation (cost less accumulated depreciation). Theseamounts were $4,000 for cleaning equipment and $5,000 for delivery trucks as of January1, 2008. Depreciation for 2008 was $2,000 for cleaning equipment and $5,000 for deliverytrucks.

WHITEGLOVES JANITORIAL SERVICE

Balance Sheet

December 31, 2008

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 / Nancy Kohl, 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 or individually, answer the following.

(a)Prepare a correct balance sheet. (Current asset $73,900)

WHITEGLOVES JANITORIAL SERVICE

Balance Sheet

December 31, 2008

Assets / Liabilities and Owner’s Equity
Current assets / Current liabilities
Cash / Notes payable
Accounts receivable / Accounts payable
Janitorial supplies / Total current liabilities
Prepaid insurance / Long-term liability
Total current assets / Notes payable
Property, plant, and equipment / Total liabilities
Cleaning equipment (net) / Owner’s equity
Delivery trucks (net) / Nancy Kohl, Capital
Total property, plant, and equipment
Total assets / $73,900 / Total liabilities and owner’s equity / $73,900

(b)Were the terms of the bank loan met? Explain.

(c)Use journal entries to support your answers.