GAAP: Situation: You are beginning the 2016 audit of Alta Tierra Company\'s long
ID: 2561414 • Letter: G
Question
GAAP:
Situation: You are beginning the 2016 audit of Alta Tierra Company's long-term debt, and you determine that the companys long-term note payable requires that it comply with certain 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 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 Officerk 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 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 parnter that answeres whether the longterm 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 Altra Tierra met the 2016 year-end covenant, but it was probably that the first quarter 2017 current ratio covenant would be violated?
Explanation / Answer
If breach of covenant take place after year as per question on quarter end then answer would be different because we assess the classification of current or non current at the Balance Sheet date and determine the payment liability from balance sheet date to next year then classifieds as Current otherwise Non current.
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