The Following Covenants Are Extracted from the Indenture for McMorris

question 27

Essay

The following covenants are extracted from the indenture for McMorris Industries' 20 year-bond.The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance. REQUIRED: Assume that each of these is an independent scenario and identify the audit steps that should be taken or reporting requirements necessary in connection with (a)through (d). a.The debtor company shall endeavor to maintain a working capital ratio of 2.5 to 1 at all times,and,in any fiscal year following a failure to maintain this ratio,the company shall restrict compensation of the CEO and executive officers to a total of no more than $1,000,000.Executive officers for this purpose shall include the chairman of the board of directors,the president,all vice presidents,the secretary,and the treasurer. b.The debtor company shall insure all property that is security for this debt against loss by hurricane to the extent of 90% of its actual value.Insurance policies securing this protection shall be filed with the trustee. c.The debtor company shall pay all taxes legally assessed against the property that serves as security for this debt within the time provided by law for payment without penalty and shall deposit receipted tax bills or equally acceptable evidence of payment of same with the trustee. d.A sinking fund shall be established and deposited with the trustee by semiannual payments of $450,000,from which the trustee shall,at his/her discretion,purchase bonds of this issue. Any failure,or likely failure,of McMorris Industries to comply with the covenants should be reported in a note to the financial statements.

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Definitions:

Michael Kors

A globally recognized luxury fashion brand known for its handbags, clothing, and accessories, founded by the designer Michael Kors.

Macy's

An American department store chain known for its wide range of consumer goods, including clothing, accessories, and home furnishings.

Target Customers

Individuals or groups identified as the primary audience for a business's products or services, often characterized by specific needs and preferences.

Manufacturers

Entities involved in the process of producing goods from raw materials through various means, such as machinery, labor, and assembly processes.