If a firm has agreed to a debt covenant that specifies a maximum ratio of debt-to-total tangible assets,the probability of breaching the covenant is reduced if:
A) additional borrowing is undertaken
B) advertising is treated as an asset rather than as an expense
C) depreciation is charged at a higher rate
D) research and development costs are treated as an expense rather than as an asset

Question

Quizplus · Accepted Answer

Treating advertising as an asset rather than an expense increases total tangible assets, thus reducing the debt-to-total tangible assets ratio and lowering the probability of breaching the covenant.

If a Firm Has Agreed to a Debt Covenant That