You are auditing a manufacturing company for the year ended December 31, 2019. The company has...
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• You are auditing a manufacturing company for the year ended December 31, 2019. The company has substantial long-term debt of approximately $20,000,000. The company is roughly break-even for 2019 & is operating in a highly competitive industry. • • The long-term debt is collateralized by the Company's property, plant & equipment. While reviewing the loan agreements in the permanent file, you note covenants which: o restrict payment of dividends o restrict additional borrowings o restrict use of assets for collateral on other debt o require the borrower to maintain a current ratio of no less than 2:1 • During your audit of long-term debt, you verify that the Company is in compliance with all of the loan covenants -- except the current ratio @ December 31, 2017 is 1.65:1. The company's controller agrees with your computation. • The loan documents make it clear that if the borrower violates any of the loan covenants, the debt can be called (i.e. the bank can demand payment in full immediately). If the borrower cannot pay the debt when called, the lender can foreclose and possibly force the borrower into bankruptcy. The company has no way of paying off the entire debt immediately (many companies are in the same situation). How can the audit team work with the company to try and resolve this covenant violation situation in a favorable manner? • You are auditing a manufacturing company for the year ended December 31, 2019. The company has substantial long-term debt of approximately $20,000,000. The company is roughly break-even for 2019 & is operating in a highly competitive industry. • • The long-term debt is collateralized by the Company's property, plant & equipment. While reviewing the loan agreements in the permanent file, you note covenants which: o restrict payment of dividends o restrict additional borrowings o restrict use of assets for collateral on other debt o require the borrower to maintain a current ratio of no less than 2:1 • During your audit of long-term debt, you verify that the Company is in compliance with all of the loan covenants -- except the current ratio @ December 31, 2017 is 1.65:1. The company's controller agrees with your computation. • The loan documents make it clear that if the borrower violates any of the loan covenants, the debt can be called (i.e. the bank can demand payment in full immediately). If the borrower cannot pay the debt when called, the lender can foreclose and possibly force the borrower into bankruptcy. The company has no way of paying off the entire debt immediately (many companies are in the same situation). How can the audit team work with the company to try and resolve this covenant violation situation in a favorable manner?
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There are a few things the audit team can do to try and resolve this covenant violation situation in ... View the full answer
Related Book For
Intermediate Accounting IFRS
ISBN: 978-1119372936
3rd edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Posted Date:
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