Reference no: EM131260906
As of January 20, 2015, preliminary financial statement numbers for the year ended December 31, 2014, have been compiled. It looks like Chiso will violate the current ratio loan covenant. Violation could be very costly in two ways. First, Rio Grande National Bank has historically raised the interest one-half of a point on loans with covenant violations. Second, a violation will increase the perceived riskiness of Chiso and make future borrowing more costly. The 2014 financial statement numbers are just preliminary, and the senior accounting staff of Chiso have discussed the following two options to avoid violation:
1. Reclassify "long-term investment property" as "short-term property held for sale." Doing this would require a statement from management that the intention is to sell the property within one year. Actually, Chiso intends to hold the property for several more years, and the property classifications would be changed back to long-term next year when the threat of covenant violation has hopefully disappeared.
2. Reclassify certain short-term loans as long-term on the basis that Chiso will refinance the loans. Technically, this is true. However, Chiso has no formal refinancing commitment and will not have one until some time in June.
You have been chosen to present the findings of the accounting staff to the board of directions. What points will you emphasize in your presentation?
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: As of January 20, 2015, preliminary financial statement numbers for the year ended December 31, 2014, have been compiled. It looks like Chiso will violate the current ratio loan covenant. Violation could be very costly in two ways. Reclassify "long-t..
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