A lender may limit the ability of a company to pay future dividends in order to ensure that loan proceeds are used for purposes that will increase the company's profits and ability to repay the loans.Which of the following statements is true in this regard?
A)The circumstance described in the statement is an example of a loan covenant.
B)The lender may require instant repayment of debt if the loan proceeds are instead used to finance the payment of dividends.
C)Such restrictions must be reported in the notes to the financial statements.
D)All of the answers are acceptable.

Question

Quizplus · Accepted Answer

The statement describes a loan covenant, which is an agreement or condition included in a loan agreement that the borrower must comply with. If the borrower uses the loan proceeds for purposes not agreed upon, such as financing dividends, the lender may indeed require immediate repayment. Additionally, these restrictions are significant enough to affect the financial decisions of the company and therefore must be disclosed in the notes to the financial statements to inform investors and creditors about the financial obligations and restrictions faced by the company.

A Lender May Limit the Ability of a Company to Pay