Question

Transit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2021. Transit's fiscal year ends on December 31. Its annual financial statements are issued in April. 1. Transit has outstanding 8.4% bonds with a face amount of $67 million. The bonds mature on July 31, 2027. Bondholders have the option of calling (demanding payment on) the bonds on July 31, 2022, at a redemption price of $67 million. Market conditions are such that the call option is not expected to be exercised. 2. A $45 million 8% 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 six months. That ratio was 1.75 on December 31, 2021, due primarily to an intentional temporary decline in parts inventories. Normal inventory levels will be reestablished during the sixth week of 2022. 3. Transit management intended to refinance $53 million of 4% notes that mature in May 2022. In late February 2022, prior to the issuance of the 2021 financial statements, Transit negotiated a line of credit with a commercial bank for up to $48 million any time during 2022. 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, 2022, judgment was rendered against Transit in the amount of $42 million plus interest, a total of $43 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 8.4% bonds be classified by Transit among liabilities in its balance sheet? 2. How should the 8% bank loan be classified by Transit among liabilities in its balance sheet? 3. How should the 4% 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, 2021. Transit's accounts payable and accruals were $55 million.

Answer 1

S01: Transit As lines provides regional jet service in the mid--south. = The bonds mature on July 31. 2027. - The bonds on tul4 31.2022. aut a sedemption Price $67 minion. 1 The a Pransit has outstanding 8.4% bonds with a face amount of $ 67 million. - The 8,4% bonds should be classified as "current liability" in Transit's balance sheet. - This is because there is an option to calling the bonds on July 31. then the liability will have to be paid on July 31, 2017 and this will represent a period that is less than a year (from December 31, 2016 to july 31. 2017) The amount to be recorded will be $6.7 million 2) The 8% loan of $45 million will be recorded as a "long term liability". - This is because the loan is payable in the year 2022 and so will be in the books for a period of more than one year.

>> This will ensure that celorent Patio is in the теаѕеd бооgе. >> The decline in parts inventories is international and will be corrected. » The amount to be recorded is $45 million i.e the amount of the loan. 3) The amaent ob 8.53 million - $48 million - $5 million. & It will be mature in may 2017 As the period is less than a year a) It will be recorded as a "cuorent liability" The amount will be $5 million. > The balance amount $48 milion will mature two years. <. Hence the amount of $48 million will be accorded as a long tom liability 4 the lawsuit adis closuse note should be provided a) Because the suit is in alpeal and as per accounting laws will not be considered poobable

5) Total current liabilities accounts Payblet 8.4% bonds + current portion et 4% notes - $55 milion + $67 million + $5 million = $12.7 million. Total current liabilities = $127 million Long term alebt -8% bont loan+4% notes | - $45 million + $48 million Long term dent = $93 million Total Habilities - Curovent + long leom * 127 +93 Total Qobilities = $ 220 million