Reference no: EM132556331

Question - Citizens Bank has just received draft financial statements from ABC Wholesalers, one of its clients. In the loan agreement between the bank and ABC, there is a covenant that requires the company to have a debt to assets ratio that does not exceed 54% and a times interest earned ratio that exceeds 4.9 times. Alex Scullion, the controller of ABC, prepared the draft statement of financial position at year end that indicated that total assets were $95,000 and total liabilities were $40,850. The draft income statement for the year showed income from operations of $125,670 and interest expense of $21,300. The income tax rate is 30%. After receiving the draft financial statements, the bank was informed by Alex's boss, Jennifer Woo, that three errors were made when the draft financial statements were prepared. They were: (1) interest of $2,380 was not accrued on a loan payable, (2) a loan payment was debited completely to the bank loan liability account when $1,660 of the payment related to interest, and (3) proceeds of $2,870 from the sale of gift cards were recorded as revenue even though the gift cards have not yet been redeemed (Hint: Use the Unearned Revenue account.)

Required - Calculate the ratio values used for the bank's covenant tests based on the information in the original draft statements.