Scrubber,Inc.presented the following information in a note to its financial statements for the year ending December 31,2012: 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 .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,.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.

Question

Quizplus · Accepted Answer

Scrubber has violated its loan agreement because the cash balance after adjustments is less than the required $75,000. The current and debt-to-equity ratios are both within the limits set by the agreement.