Question

Problem 13-3 Current-noncurrent classification of debt [LO13-1, 13-4]

The balance sheet at December 31, 2018, for Nevada Harvester Corporation includes the liabilities listed below:

1. 11% bonds with a face amount of $40 million were issued for $40 million on October 31, 2009. The bonds mature on October 31, 2029. Bondholders have the option of calling (demanding payment on) the bonds on October 31, 2019, at a redemption price of $40 million. Market conditions are such that the call is not expected to be exercised.
2. Management intended to refinance $6 million of its 10% notes that mature in May 2019. In early March, prior to the actual issuance of the 2018 financial statements, Nevada Harvester negotiated a line of credit with a commercial bank for up to $5 million any time during 2019. Any borrowings will mature two years from the date of borrowing.
3. Noncallable 12% bonds with a face amount of $20 million were issued for $20 million on September 30, 1996. The bonds mature on September 30, 2019. Sufficient cash is expected to be available to retire the bonds at maturity.
4. A $12 million 9% bank loan is payable on October 31, 2024. The bank has the right to demand payment after any fiscal year-end in which Nevada Harvester’s ratio of current assets to current liabilities falls below a contractual minimum of 1.7 to 1 and remains so for six months. That ratio was 1.45 on December 31, 2018, due primarily to an intentional temporary decline in inventory levels. Normal inventory levels will be reestablished during the first quarter of 2019.

Required:
1. For each liability listed above, what amount will be reported as a current liability on the December 31, 2018 balance sheet?
2. Prepare the liability section of a classified balance sheet for Nevada Harvester at December 31, 2018. Accounts payable and accruals are $22 million.
  

Answer 1

ques 1
Scenario	Current Liability Amount ($ in millions)
a.	$40.00
b.	$1.00
c.	$20.00
d.	0
a. The requirement to classify currently maturing debt as a current liability includes debt that is callable by the creditor in the upcoming year—even if the debt is not expected to be called. So, the entire $40.0 million debt is a current liability
			b. $5 million can be reported as long term, but $1 million must be reported as a current liability. Short-term obligations that are expected to be refinanced with long-term obligations can be reported as noncurrent liabilities only if the firm (a) intends to refinance on a long-term basis and (b) actually has demonstrated the ability to do so. Ability to refinance on a long-term basis can be demonstrated by either an existing refinancing agreement or by actual financing prior to the issuance of the financial statements. The refinancing agreement in this case limits the ability to refinance to $5 million of the notes. In the absence of other evidence of ability to refinance, the remaining $1 million cannot be reported as long term.
c.
The entire $20 million maturity amount should be reported as a current liability because that amount is payable in the upcoming year and it will not be refinanced with long-term obligations.
						d. The entire $12 million loan should be reported as a long-term liability because that amount is payable in 2024 and it will not be refinanced with long-term obligations.
NEVADA HARVESTER CORPORATION
Balance Sheet (partial)
At December 31, 2018
		($ in millions)
Current Liabilities
Accounts payable and accruals		$22.00
10% notes payable due May 2019		$1.00
Currently maturing portion of long-term debt:
11% bonds due October 31, 2029 redeemable on October 31, 2019	$40.00
12% Bonds due September 30, 2019	$20.00	$60.00
Total Current Liabilities		$83.00
Long-Term Debt
Currently maturing debt classified as long-term:
10% notes payable due May 2019		$            5.00
9% bank loan due October 2024		$          12.00
Total Long-term Liabilities		$          17.00
Total Liabilities		$        100.00