You are auditing the balance sheet section of a client\'s balance sheet as of 12

Question

You are auditing the balance sheet section of a client's balance sheet as of 12/31/2010. You see that there is a $1,000,000 long-term debt outstanding to Sturdy Savings Bank which is due on 12/15/2015. You read the loan agreement and see that there is an acceleration clause .The clause reads that the borrower cannot borrow more than $10,000 from any other entity during the term of the $1,000,000 without prior approval of Sturdy Savings Bank. If your client violates this clause, the $1,000,000 becomes due and payable upon demand of the lender. Assume that you client had violated the acceleration clause on 11/1/2010. Discuss how you would handle this situation and how it might affect your client's financial statements for the year ended 12/31/10

Can someone help explain this? and how would i handl

Explanation / Answer

I would first tell my client they did this, and then I would move the million from long term debt to accounts payable. 

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