Question

Transit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2018. Transit’s fiscal year ends on December 31. Its annual financial statements are issued in April.

1. Transit has outstanding 7.6% bonds with a face amount of $79 million. The bonds mature on July 31, 2027. Bondholders have the option of calling (demanding payment on) the bonds on July 31, 2019, at a redemption price of $79 million. Market conditions are such that the call option is not expected to be exercised.

2. A $21 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 Transit’s ratio of current assets to current liabilities falls below a contractual minimum of 1.9 to 1 and remains so for 6 months. That ratio was 1.75 on December 31, 2018, due primarily to an intentional temporary decline in parts inventories. Normal inventory levels will be reestablished during the sixth week of 2019.

3. Transit management intended to refinance $42 million of 7% notes that mature in May of 2019. In late February 2019, prior to the issuance of the 2018 financial statements, Transit negotiated a line of credit with a commercial bank for up to $38 million any time during 2019. Any borrowings will mature two years from the date of borrowing.

4. Transit is involved in a lawsuit resulting from a dispute with a food caterer. On February 13, 2019, judgment was rendered against Transit in the amount of $48 million plus interest, a total of $49 million. Transit plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.

Required: 1. How should the 7.6% bonds be classified by Transit among liabilities in its balance sheet?

2. How should the 9% bank loan be classified by Transit among liabilities in its balance sheet?

3. How should the 7% notes be classified by Transit among liabilities in its balance sheet? 4. How should the lawsuit be reported by Transit?

5. Calculate the total current liabilities, total long-term liabilities, and total liabilities of a classified balance sheet for Transit Airlines at December 31, 2018. Transit's accounts payable and accruals were $53 million.

Complete this question by entering your answers in the tabs below.

• Req 1 to 4
• Req 5

How should the 7.6% bonds, 9% bank loan and 7% notes be classified by Transit among liabilities in its balance sheet. How should the lawsuit be reported by Transit? (Enter your answers in millions.)

	1 million 2 million 3 million million 4 The lawsuit should be reported as:

Calculate the total current liabilities, total long-term liabilities, and total liabilities of a classified balance sheet for Transit Airlines at December 31, 2018. Transit's accounts payable and accruals were $53 million. (Enter your answers in millions.)

	Total current liabilities million Total long-term liabilities million Total liabilities million

Answer 1

How should the 7.6% bonds, 9% bank loan and 7% notes be classified by Transit among liabilities in its balance sheet. How should the lawsuit be reported by Transit? (Enter your answers in millions.)
1	Current Liability (7.6% Bonds)	$       79.00	million
2	Long term Liability (9% Bank loan)	$       21.00	million
3	Current Liability (7% notes)	$         4.00	million
	Long term Liability (7% notes )	$       38.00	million
4	The lawsuit should be reported as:	A disclosure note
Calculate the total current liabilities, total long-term liabilities, and total liabilities of a classified balance sheet for Transit Airlines at December 31, 2018. Transit's accounts payable and accruals were $53 million. (Enter your answers in millions.)
Current Liabilities
Accounts payable and accruals	$                                          53.00
7% notes payable due May 2019	$                                            4.00
Callable Bonds	$                                          79.00
Total current liabilities		$     136.00	million
Long term Liabilities
Refinancing Commercial note	38
Bank loan payable on october 31, 2024	21
Total long-term liabilities		59	million
Total liabilities		$     195.00	million