Scrubber, Inc. presented the following information in a note to its financial statements for the year ending December 31, 2017:

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 ratio should not exceed 0.7 to 1 at any time.
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, 0.2 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 0.3 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.

Question

Scrubber, Inc. presented the following information in a note to its financial statements for the year ending December 31, 2017:

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 ratio should not exceed 0.7 to 1 at any time.
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, 0.2 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 0.3 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.

Quizplus · Accepted Answer

The company has violated its loan agreement because the Cash account balance is less than the required minimum of $75,000. The current ratio and debt-to-equity ratio are both in compliance with the agreement.