Warped Company has the following liabilities at December 31, 2015. For each liability, indicate the amount...

Warped Company has the following liabilities at December 31, 2015. For each liability, indicate the amount that should be reported as a current and non-current on the December 31, 2015 Balance Sheet:

a.

$18 million of 10% notes are due on March 31, 2017. A debt covenant requires Warped Company to maintain current assets at least equal to 150% of its current liabilities. On December 31, 2015, Warped is in violation of this covenant. Warped Company obtained a waiver from a bank until June 2016, having convinced the bank that the company's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of 2016.

b.

$30 million of 8% notes were issued for $30 million on May 31, 2011. The notes mature on May 31, 2021, but investors have the option of calling (demanding payment on) the notes on June 30, 2016. However, given current market conditions it is not expected that the call option will be exercised.

Expert Solution

Non- Current Liabilities: Financial liabilities that provide financing on a long-term basis (i.e. are not part of the working capital used in the entity’s normal operating cycle) and are not due for settlement within twelve months after the reporting period are non-current liabilities.

Current Liabilities: An entity classifies its financial liabilities as current when they are due to be settled within twelve months after the reporting period, even if:

the original term was for a period longer than twelve months, and
an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are approved for issue.

Answer (a)

Facts: Given that, $18 million of 10% notes are due on March 31, 2017. A debt covenant requires Warped Company to maintain current assets at least equal to 150% of its current liabilities. On December 31, 2015, Warped is in violation of this covenant. Warped Company obtained a waiver from a bank until June 2016, having convinced the bank that the company's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of 2016.

Provision: As per Accounting Standards, when an entity breaches a provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, the entity does not classify the liability as current, even if the lender agreed, after the reporting period and before the approval of the financial statements for issue, not to demand payment as a consequence of the breach. However, an entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

Analysis & Conclusion: In the given case, the Warped company breached the covenant on 31st December 2015, but however it has obtained a waiver from the bank until June 2016 (but not exceeding 12 months), hence the same shall be treated as Current Liability as the grace period is within 12 months after the reporting period.

Answer (b)

Facts: Given that, $30 million of 8% notes were issued for $30 million on May 31, 2011. The notes mature on May 31, 2021, but investors have the option of calling (demanding payment on) the notes on June 30, 2016. However, given current market conditions it is not expected that the call option will be exercised.

Provision: As per Accounting Standards, if an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as current.

Analysis & Conclusion: In the given case, the maturity of notes is on May 31, 2021 and the entity expects that the call option will not be exercised by the investors on June 30, 2016. As the entity expects and has a discretion to roll over an obligation for exceeding twelve months after the reporting period (i.e, on 31^st December 2015), the aforesaid amount $30 million of 8% notes shall be classified as Non- Current Liability.

ekkarill92 answered 1 year ago

Analyzing and Determining the Amount of a Liability For each of the following situations, indicate the...

Analyzing and Determining the Amount of a Liability For each of the following situations, indicate the liability amount, if any, which is reported on the balance sheet of Hirst, Inc., at December 31, 2018. a. Hirst owes $110,000 at year-end 2018 for its inventory purchases. b. Hirst agreed to purchase a $28,000 drill press in January 2019. c. During November and December of 2018, Hirst sold products to a firm with a 90-day warranty against product failure. Estimated 2019 costs...

For each item, indicate the account and the related amount to be reported as a current liability on the Big Wave Marine balance sheet at December 31.

For each item, indicate the account and the related amount to be reported as a current liability on the Big Wave Marine balance sheet at December 31. Account Amount a. Account Amount b. Account Amount c. Account Amount d. Account Amount e. Choose from any list or enter any number in the input fields and then continue to the next question. More Info a. December revenue totaled $ 150 comma 000; and, in addition, Big Wave collected sales tax of 5%....

At December 31, 2015, EarthWear has $5,890,000 in a liability account labeled “Reserve for returns.” The...

At December 31, 2015, EarthWear has $5,890,000 in a liability account labeled “Reserve for returns.” The footnotes to the financial statements contain the following policy: “At the time of sale, the company provides a reserve equal to the gross profit on projected merchandise returns, based on prior returns experience.” The entity has indicated that returns for sales that are six months old are negligible, and gross profit percentage for the year is 42.5 percent. The entity has also provided the...

Buck Co. has a deferred income tax liability in the amount of $192,000 at 31 December...

Buck Co. has a deferred income tax liability in the amount of $192,000 at 31 December 20X7, relating to a $600,000 receivable. This sale was recorded for accounting purposes in 20X7 but is not taxable until the cash is collected. In 20X8, $400,000 is collected. Warranty expense in 20X8 included in the determination of pre-tax accounting income is $165,000, with the entire amount expected to be spent and deductible for tax purpose in 20X9. Pre-tax accounting earnings are $735,000 in...

On December 31, 2015, Sveva Inc. has total liabilities of $112,000 and total equity of $220,000....

On December 31, 2015, Sveva Inc. has total liabilities of $112,000 and total equity of $220,000. The company needs to raise additional funds through debt and equity. The company will issue 25,000 shares of common stock at $11.10 per share and in addition it intends to borrow as much as it can from Bank of Switzerville. Bank of Switzerville requires a maximum debt-to-asset ratio of 0.6. What is the maximum additional amount that Sveva can borrow after the additional stock...

The long-term liabilities section of CPS Transportation’s December 31, 2015, balance sheet included the following: a. A...

The long-term liabilities section of CPS Transportation’s December 31, 2015, balance sheet included the following: a. A lease liability with 15 remaining lease payments of $10,000 each, due annually on January 1: Lease liability $76,061 Less: Current portion 2,394 $73,667 The incremental borrowing rate at the inception of the lease was 11% and the lessor’s implicit rate, which was known by CPS Transportation, was 10%. b. A deferred income tax liability due to a single temporary difference. The only difference...

Indicate the amount Erismus would record as an asset, liability, or not accrued in the following...

Indicate the amount Erismus would record as an asset, liability, or not accrued in the following circumstances. 1. Erismus is defending against a lawsuit. Erismus's management believes the company has a slightly worse than 50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,860,000. 2. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages could fall...

On December 31, 2015, Alpha had the following balances (all balances are normal): Accounts Amount Preferred...

On December 31, 2015, Alpha had the following balances (all balances are normal): Accounts Amount Preferred Stock, ($100 par value, 5% noncumulative, 50,000 shares authorized, 10,000 shares issued and outstanding) $1,000,000 Common Stock ($10 par value, 200,000 shares authorized, 100,000 shares issued and outstanding) $1,000,000 The following events occurred during 2015 and were not recorded: On January 1, Alpha declared a 5% stock dividend on its common stock when the market value of the common stock was $15 per share...

Flamingo, a limited liability company, has an accounting year end of 31 December. The accountant is...

Flamingo, a limited liability company, has an accounting year end of 31 December. The accountant is preparing the financial statements as at 31 December 2019 and requires your assistance. The following unadjusted trial balance has been extracted from the general ledger. account Dr Cr Plant & Equipment at cost 370,000 Plant & Equipment accumulated depreciation, 1 Jan 2019 30,000 Building at cost 110,000 Building accumulated depreciation, 1 Jan 2019 55,000 Prepaid rent 30,000 Bank balance 35,000 Revenues 915,000 Supplies 15,000...

Waddell Company had the following balances in its accounting records as of December 31, 2015: ...

Waddell Company had the following balances in its accounting records as of December 31, 2015: Assets Liabilities and Equity Cash $ 55,000 Accounts Payable $ 27,000 Accounts Receivable 53,000 Common Stock 89,000 Land 28,000 Retained Earnings 20,000 Total $ 136,000 Total $ 136,000 The following accounting events apply to Waddell Company's 2016 fiscal year: Jan. 1 Acquired $56,000 cash from the issue of common stock. Feb. 1 Paid $5,700 cash in advance for a one-year lease for...

Question