Reference no: EM131972088
Problem
Rutherford Clean Service started 2 years ago by Ernest Rutherford. Because business has been exceptionally good, Rutherford decided on July 1, 2013 to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Rutherford obtained on July 1, 2014 a P25,000, 10% bank loan, payable P10,000 on 1 July 2015, and the balance on 1 July 2016. The terms of the loan require the borrower to have P10,000 more current assets than current liabilities as at 31 December 2014. If these terms are not met, the bank loan will be refinanced at 15% interest. As at 31 December 2014, the accountant for EVERCLEAN Service prepared the statement of financial position shown below.
Rutherford presented the statement of financial position to the bank's loan officer on 2 January 2014, confident that the business had met the terms of the loan. The loan officer was not impressed. He said, "We need financial statements audited by a qualified accountant." A qualified accountant was hired and immediately realized that the statement of financial position had been prepared from a trial balance and not from an adjusted trial balance. The adjustment data at the reporting date consisted of the following:
Earned but not invoiced cleaning service were P5,700.
Cleaning supplies on hand were P2,800.
Prepaid insurance was a 3-year policy dated 1 January 2014.
December expenses incurred but unpaid as at 31 December 2014, P700.
Interest on the bank loan was not recorded.
The amounts for property, plant and equipment presented in the financial position were reported net of accumulated depreciation (cost less accumulated depreciation). These amounts were P4,000 for cleaning equipment and P5,000 for delivery trucks as at 1 January, 2014. Depreciation for 2014 was P2,000 for cleaning equipment and P5,000 for delivery trucks.
Required:
Journalize the above transactions.
Prepare a correct statement of financial position in good format per above.
Prepare a new statement of owner's equity, identifying the increase (decrease) in accounts after the adjustments.
Where the terms of the bank loan met? Explain.