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.

Question

Quizplus · Accepted Answer

Management may undertake revaluations when asset values are rising to improve the debt-to-asset ratio, thus complying with debt covenants that restrict the level of debt relative to assets.

Where There Are Debt Covenants in Place to Restrict the Level