Question

C14-12 Researching GAAP C14-1 Situation You are 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 cer tain financial covenants. The note payable is dated January 1, 2013, has a face value of $1,000,000, is due December 31, 2022, and is held by First Bank of Apex. The note pay able requires that Alta Tierra maintain a min imum 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 Finan- cial 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 reclas sified. 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.

can anyone help me with this assignment?Tia

Answer 1

As per related GAAP -

Case 1: 90 days waiver allowed by First Bank of Apex.

We can consider that there is a violation of the terms & conditions in the current year but is corrected within a short span of time so it not required to reclassify as current debt.

Case 2: 15 months waiver allowed by First Bank of Apex.

We can consider that there is a violation of the terms & conditions in the current year but as the same is corrected after 1 yr the same is treated as a violation. hence need to be reclassified as current asset.

Case 3: Current ratio is less than 1.25 in first quarter of 2017

As the same is not related to 2016 it is not required to specify in the report.