Scrubber, Inc

question 121

Multiple Choice

Scrubber, Inc. presented the following information in a note to its financial statements for the year ending December 31, 2016: 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.

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