Debt covenants are frequently included by lenders; however, the covenant may not specify the accounting methods a company must follow for the life of the loan. In order to avoid defaulting on a covena

Debt covenants are frequently included by lenders; however, the covenant may not specify the accounting methods a company must follow for the life of the loan. In order to avoid defaulting on a covenant, management may “manage” or “manipulate” earnings. Consider an accounting estimate and provide an example of how a company can manage or manipulate earnings to avoid a debt covenant default. As a reminder, some changes in estimate include, but are not limited to: bad debts, warranties, depreciation (changes in useful life, salvage value, or method), inventory obsolescence, etc.