Rock Canyon Enterprises has a five$-$year loan with a large bank This loan includes a covenant requiring

Rock Canyon Enterprises to have "tangible net assets of at least $$50$ million." The loan agreement

calculates tangible net assets as follows:

Tangible net assets $=($Total assets $-$ Intangible assets$)-$ Total liabilities

If the company's tangible net drops below $$50$ million, then the entire loan amount becomes due. At the

end of the year, Rock Canyon Enterprises has total assets of $$250$ million, which includes $$57$ million in

intangible assets $($i$.$e$.$ goodwill, patents, copyrights$)$ and total liabilities of $$145$ million.

One of Rock Canyon Enterprises investments includes a $10\%$ state in a private company. The fair value of

this investment currently is stated on the balance sheet at $$7$ million. However, Eric Yost, the chief

accountant $[$of Rock Canyon$]$ would like to alter a few of the assumptions used to value this investment

to achieve a fair value of $$10$ million. He explains that valuing private company investments $"$is very

squishy business" and that the bank is unlikely to push back on their valuation.

Required:

Understand the reporting effect: Calculate Rock Canyon Enterprises tangible net assets before

Eric Yost's proposed change. Is the debt covenant violated?

Specify the options: Calculate Rock Canyon Enterprises tangible net assets after Eric Yost's

proposed change. Is the debt covenant violated?

Identify the impact: Does the change in assumption potentially affect the bank?

Make a decision: Should Rock Canyon Enterprises revalue the private company investment?