Reference no: EM13370765
Erik Rekdahl, senior-in-charge, is auditing Koonce Katfood, Inc.'s, long-term debt for year ended 31st December. Long-term debt is composed of two bond issues, which are due in 10 and 15 years, correspondingly. The debt is held by two insurance companies. Rekdahl has examined bond agreements for each issue. The agreements give that if Koonce fails to comply with the covenants of contract, the debt becomes payable instantly. Rekdahl identified the subsequent covenants when reviewing the bond agreements:
"The debtor company shall endeavor to sustain a working capital ratio of 2 to 1 at all times, and in any fiscal year subsequent a failure to maintain said ratio, the company shall restrict compensation of officers to a total of $650,000. Officers add the chairperson of the board and the president."
"The debtor company shall keep all belongings that is security for these debt agreements insured against loss by fire to extent of 100 % of its actual value. Policies of insurance comprising this protection shall be filed with trustee."
"The company is needed to restrict 40 percent of retained earnings from availability for paying dividends."
"A sinking fund shall be established with First Morgan Bank of Austin, and semiannual payments of $500,000 shall be deposited in fund. The bank can, at its discretion, purchase bonds from either issue."
a. Give any audit steps that Rekdahl should conduct to evaluate if the company is in compliance with the bond indentures.
b. Show any reporting requirements that financial statements or footnotes should include.