Where There Are Debt Covenants in Place to Restrict the Level

question 27

Multiple Choice

Where there are debt covenants in place to restrict the level of debt to assets then management may be motivated to:

• A) Avoid revaluations because an increase in asset values increases depreciation and therefore reduces profit.
• B) Undertake revaluations where the expectation is that asset values have fallen.
• C) Avoid revaluations because of their effect on the cash flows of the business and therefore its ability to pay interest under the debt covenant.
• D) Undertake revaluations where the expectation is that asset values are rising.
• E) None of the given answers.

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Definitions:

Direct Labour Hours

The total number of hours worked by employees directly involved in the production of goods or services.

Labour Efficiency Variance

The difference between the actual labor hours used and the standard labor hours expected to produce a certain level of output.

Standard Labour Rate

The predetermined or expected cost per unit of labor, used in budgeting and cost control.

Variable Overhead Efficiency Variance

The difference between the actual level of activity (direct labor-hours, machine-hours, or some other base) and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate.