Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Accounting Basics Expert

On September 10, Melinda Johnson was auditing the financial statements of a new audit client, Mother Earth Foods, a health-food chain that has a June 30 year-end. The company is privately held and has just gone through a leveraged buyout with long-term financing that includes various restrictive covenants.

In order to obtain debt financing, companies often have to agree to certain conditions, some of which may restrict the way in which they conduct their business. If the borrower fails to comply with the stated conditions, it may be considered in default, which, which would give the lender the right to accelerate the due date of the debt, add other restrictions, waive the default for a stated period, or revise the covenants. Usually there is a grace period during which the borrower can cure the default.

Johnson believes that it is possible that at August 31 Mother Earth was in violation of the debt covenant restrictions, which became effective on that date. The debt covenants require the company to maintain a certain receivable turnover rate. Johnson is not certain, however, because the accounting records, including period-end cutoffs for sales and purchases, have not been well maintain. Nevertheless, Mother Earth's executives assure Johnson that if they were in violation, the company will be able to obtain a waiver or modification of the covenant.

Required:

a. Discuss the audit procedures that Johnson would conduct to determine if Mother earth would violated the debt covenants. How would Johnson determine whether Mother Earth would be able to obtain a waiver, assuming that the company was in violation of the debt covenants?

b. Based on the case scenario and financial accounting pronouncements about the classification of obligations that are callable by the creditor, should Mother Earth continue to classify this debt as noncurrent? Justify your answer.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M947529

Have any Question? 


Related Questions in Accounting Basics

Questionson may 5 2006 disney company completed an all

Questions On May 5, 2006, Disney Company completed an all stock acquisition of Pixar, a digital animation studio. Disney believes that the creation of high quality feature animation is a key driver of success across many ...

Problem -the stay healthy medical clinics balance sheet on

Problem - The Stay Healthy Medical Clinic's Balance sheet on December 31, 2014 showed an owner's equity of $1,280,000. The December 31, 2015 balance sheet showed an owner's equity of $1,520,000. During the year, the owne ...

Assignmentresearch the foreign corrupt practices actaddress

Assignment: Research "THE FOREIGN CORRUPT PRACTICES ACT" Address, at a minimum, the following: The rationale for the Act (i.e. why was it implemented) What the Act prohibits How the Act impacts businesses nationally, and ...

1 the prices of financial assets are based on the expected

1. The prices of financial assets are based on the expected value of future cash flows, discount rate, and past dividends. A. True B. False 2. By using different discount rates, the market allocates capital to companies ...

1 a b and c are the members of all llc a limited liability

1. A, B and C are the members of All, LLC, a limited liability company that is treated as a partnership for federal income tax purposes. All, LLC is contemplating taking a loan of $90,000 from a local Maryland bank to fi ...

Accounting questions1 if cash is 2345 in 20x2 and 3671 in

Accounting Questions 1. If Cash is $2,345 in 20X2 and $3,671 in 20X1, what is the percentage of increase or (decrease) from 20X1 to 20X2? A. 56.55%******* B. (56.55%) C. 36.12% D. (36.12%) 2. Gross profit by department a ...

Question 1grammys bakery had the following information for

Question 1 Grammy's Bakery had the following information for the pay period ending June 30: Employee Name Pay Rate Hours Worked Cumulative Earnings Department Federal Income Tax Withheld P. Ganster $2,000 Salaried $12,00 ...

Write a 700- to 1050-word summary of your teams discussion

Write a 700- to 1,050-word summary of your team's discussion regarding IFRS versus. GAAP. The summary should be structured in a subject-by-subject format. Include an introduction and a conclusion. Your discussion should ...

Assessment one - business research report proposal initial

Assessment One - Business Research Report Proposal: Initial Research Proposal The initial research proposal will consist of the following SIX (6) items: 1. Identify a business research topic 2. Define the research questi ...

Modern furniture company had finally arrived at the point

Modern Furniture Company had finally arrived at the point where it had a sufficient excess cash flow of $4.8 million to consider paying a dividend. It had 3 million shares of stock outstanding and was considering paying ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen