Question
Your client, Summerford Inc, has debt agreement with Valley City Bank that includes a # of restrictions and covenants. Violation of any restriction or covenant
Your client, Summerford Inc, has debt agreement with Valley City Bank that includes a # of restrictions and covenants. Violation of any restriction or covenant results in the entire amount of the debt becoming due immediately. For each of the following, provide audit procedures taht will address whether Summerford has met the restriction or covenant.
a. A current ratio of at least 1.5 to 1 must be maintained at year-end.
b. No dividends may be paid in years in whcich there is a net loss. Where there is net income, no more than one-half of the net income may be paid out in dividends.
c. The accounts receivable and inventory serve as security on the loan
d. The total of the president's and Vice-president's salaries may not exceed $800,000 during the duration of the loan.
E. Monthly payments as per the agreement are due by the 10th of the following month.
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