Question

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

A. 11% bonds with a face amount of $49 million were issued for $49 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 $49 million. Market conditions are such that the call is not expected to be exercised

B. Management intended to refinance $12.5 million of its 12% 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 $7.0 million any time during 2019. Any borrowings will mature two years from the date of borrowing.

C. Noncallable 13% bonds with a face amount of $32.4 million were issued for $32.4 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.

D. A $22 million 12% 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? (Enter your answers in millions (i.e., 5,500,000 should be entered as 5.5).)

Scenario Current Liability Amount ($ in millions)

a.

b.

c.

d

Required 2. Prepare the liability section of a classified balance sheet for Nevada Harvester at December 31, 2018. Accounts payable and accruals are $15 million. (Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

NEVADA HARVESTER CORPORATION

Balance Sheet (partial)

At December 31, 2018 ($ in millions)

Current Liabilities

Currently maturing portion of long-term debt:

Total Current Liabilities

Long-Term Debt Currently maturing debt classified as long-term:

Total Long-term Liabilities

Total Liabilities.

Answer 1

Required 1: Current Liability Amount ($ in millions)

A. 11% bonds with a face amount of $49 million were issued for $49 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 $49 million. Market conditions are such that the call is not expected to be exercised.

Current Liability is $49 million

Note: Current liability means all the liability which is payable within a year and the 11% bonds can be payable on October 31, 2019 on customer demand. So we have to recognise the 11% bonds as current liability because it became payable on October 31, 2019 on customer demand irrespective of the market conditions which is less than a year from 31^st December 2018

B. Management intended to refinance $12.5 million of its 12% 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 $7.0 million any time during 2019. Any borrowings will mature two years from the date of borrowing.

Total refinance $12.5 million

Out of $12.5 million Nevada harvester negotiated a line of credit is $7.0 million which will mature two years from the date of borrowings

Current Liability = $12.5 - $7.0miliion

= $5.5million due on May 19

Note: $7.0 million is treated as long term debt because Nevada Harvester negotiated line of credit before issuance of financial statements of 2018 and it will mature in two years from the date of borrowings and current liabilities are those which will payable with a year.

If the negotiation was done after the issuance of financial statements of 2018 then whole amount is treated as current liability in 2018 financial statements.

C. Noncallable 13% bonds with a face amount of $32.4 million were issued for $32.4 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.

Current Liability = $32.4 million

Note:   13% bonds will mature on September 30, 2019 which is within one year from the December 31, 2018.

D. A $22 million 12% 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 re-established during the first quarter of 2019.

Current Liability: $ 0

Note: Entire amount will be treated as long term debt because it is payable on October 31, 2024.

Required 2: Prepare the liability section of a classified balance sheet for Nevada Harvester at December 31, 2018. Accounts payable and accruals are $15 million.

NEVADA HARVESTER CORPORATION
Balance Sheet (Partial)
As on December 31, 2018
	($ in millions)
Current Liabilities
Accounts Payable and accruals	15.0
12% Notes due on May 2019	5.5
Currently Maturing Portion of Long –term debt
11% bond due on October 31 2029, redeemable on October 31 2019	49.0
13% bond due on September 30 2019	32.4
Total Current Liabilities	101.9
Long-Term Debt
Currently Maturing Debt Classified as long term:
12% Note due on May 2019	7.0
12% Bank loan due on October 31,2024	22.0
Total Long –Term Liabilities	29.0
Total Liabilities	130.9