Question

The balance sheet at December 31, 2021, for Nevada Harvester Corporation includes the liabilities listed below: a. 13% bonds with a face amount of $25 million were issued for $25 million on October 31, 2012. The bonds mature on October 31, 2032. Bondholders have the option of calling (demanding payment on the bonds on October 31, 2022, at a redemption price of $25 million. Market conditions are such that the call is not expected to be exercised. b. Management intended to refinance $9.4 million of its 14% notes that mature in May 2022. In early March, prior to the actual issuance of the 2021 financial statements, Nevada Harvester negotiated a line of credit with a commercial bank for up to $6.2 million any time during 2022. Any borrowings will mature two years from the date of borrowing. c. Noncallable 15% bonds with a face amount of $24.0 million were issued for $24.0 million on September 30, 2002. The bonds mature on September 30, 2022. Sufficient cash is expected to be available to retire the bonds at maturity. d. A $15 million 11% bank loan is payable on October 31, 2027. 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, 2021, due primarily to an intentional temporary decline in inventory levels. Normal inventory levels will be reestablished during the first quarter of 2022. Required: 1. For each liability listed above, what amount will be reported as a current liability and as a noncurrent liability on the December 31, 2021 balance sheet? 2. Prepare the liability section of a classified balance sheet for Nevada Harvester at December 31, 2021. Accounts payable and accruals are $29 million.

Answer 1

1.

Answer:

	($ in millions)
Scenario	Current Liability Amount	Non Current Liability
a.	$25.00	0
b.	$3.20	$6.20
c.	$24.00	0
d.	0	$15.00

Explanation:

1. Total of $25.0 million debt is a current liability. Here the call is not expected to be exercised.The need to classify currently maturing debt as current liability consist of the debt which is callable by creditor in future year even if the debt is not expected to be exercised. Hence the total $25.0 million is added as current liability and there is no non-current liability.
2. $6.2 million will be reported as non-current liability and $3.2 million will be reported as current liability. if the firm plans to refinance on a long term basis and actually has ability to do so, then the Short term liabilities that are planned to refinance with long term liabilities can be reported as noncurrent liability. Ability to refinance on a long term basis is identified when there is existing refinancing agreement or actual financing prior to financial statements issuance. The refinancing agreement here limits the ability to refinance to $6.2 million out of $9.4 million. As there are no other evidence of ability to refinance, remaining $3.2 million will be reported as current liability.
3. The total $24.0 million maturity amount will be reported as a current liability as that amount is payable in the 2022 and no plans to refinance with long term obligations.
4. The total $15.0 million loan need to be reported as non-current liability because that amount is payable in 2027 and no plans to refinance with long-term obligations. The current liability can be divided into cases where creditor has the right to ask for payment as an existing violation of provision of debt agreement makes call exercisable and case in which debt is not yet callable though will be callable within the year if the existing violation is not corrected within grace period. Here, the existing violation is expected to be corrected within specified period.

2.

Answer:

NEVADA HARVESTER CORPORATION
Balance Sheet (partial)
At December 31, 2021
		($ in millions)
Current Liabilities
Accounts payable and accruals		$29.00
14% notes payable due May 2022		$3.20
Currently maturing portion of long-term debt:
13% bonds due October 31, 2032 redeemable on October 31, 2022	$25.00
15% Bonds due September 30, 2022	$24.00	$49.00
Total Current Liabilities		$81.20
Long-Term Debt
Currently maturing debt classified as long-term:
14% notes payable due May 2022		$6.20
11% bank loan due October 2027		$15.00
Total Long-term Liabilities		$21.20
Total Liabilities		$102.40