You arc beginning the 2016 audit of Alta Tierra Company’s long-term debt, and you determine that the company’s long-term note payable requires that it comply with certain financial covenants. The note payable is dated January 1, 2013, has a lace value of $1,000,000, is due December 31, 2022, and is held by First Bank of Apex. The note payable requires that Alta Tierra maintain a minimum current ratio of 1.25, and any violation of the covenant allows the lender to call the debt. You find that Alta Tierra’s year-end current ratio is 1.1. Alta Tierra’s Chief Financial Officer, Tony Plush, informs you that the company is in violation of the debt covenant but has been granted a waiver by First Bank of Apex, so there are no consequences to the violation. The waiver allows Alta Tierra 90 days from year-end to increase its current ratio to above 1.25. Your audit partner believes that the violation is an issue and is concerned that the long-term debt must be reclassified as current.
Directions
Research the related generally accepted accounting principles and prepare a short memo to your audit partner that answers whether the long-term debt should be reclassified. How would your answer change if First Bank of Apex granted a 15-month waiver as opposed to the 90-day waiver? How would your answer change if Alta Tierra met the 2016 year-end covenant, but it was probable that the first quarter 2017 current ratio covenant would be violated? Cite your references and applicable paragraph numbers.