ONE:With respect to the Rollfast litigation described in Module I, assume that Bronys Bikes counsel states that it is more likely than not that Rollfast will be successful in its claim against Bronys Bikes and that the most likely amount that will be awarded to Rollfast is $30 million. the auditor should ( )

Answers:

Propose an audit adjustment and a note disclosure

Propose that the litigation only be disclosed in the notes

Propose either an adjustment or a disclosure in the notes

Do nothing until the litigation is settled.

FeedBack:ASC 450 requires the recognition of a liability if it is probable (more likely than not) that a liability exists. The amount should be the most likely amount to be settled or if only a range of possible outcomes exists then the lowest amount in the range is recognized.

TWO:Module XIII and Excel file 20X9 notes indicate that Bronys Bikes has violated two covenants in its loan agreement with Bank Two. Those two violations are ( )

Answers:

Excessive net income and loan payments are up to date

Excessive cash in bank and retained earnings is too low

Insufficient net income and insufficient cash in Bank Two

Insufficient retained earnings and insufficient cash in Bank Two

FeedBack:The auditors comments in WP 14.3 state that the Bank Two covenants that have been violated are the required $10 million compensating balance in the bank and that retained earnings is below the required $45 million level

THREE:With respect to the Bank Two temporary waivers of the two violated covenants ( )

Answers:

The temporary waivers do not address the going concern issue

The temporary waivers allow the debt to remain non-current

The word temporary must be more clearly defined

Guarantees Bank Two will not accelerate the loan repayment

FeedBack:To avoid having to reclassify the Bank Two long term liability to current, the temporary waiver must cover a period of at least one year after the financial reporting date.

FOUR:The most significant going concern issue for Bronys Bikes ( )

Answers:

Is if Bank Two accelerates the long term loan repayment

Insufficient inventory to meet customer demands

The audit adjustments will reduce net income to zero

The reclassification of current maturities from long-term

FeedBack:The main going concern issue for Bronys Bank is if the Bank Two long-term loan is called for repayment immediately. It is unlikely that Bronys Bikes would be able to obtain replacement long-term financing for this loan if it were to be accelerated.