Question

page 758 P 13-3 Current-noncurrent classification of debt .LO13-1, LO13-4 The balance sheet at December 31, 2021, for Nevada Harvester Corporation includes the liabilities listed below: a. 11% bonds with a face amount of 540 million were issued for $40 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 $40 million. Market conditions are such that the call is not expected to be exercised. b. Management intended to refinance 56 million of its 10% 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 $5 million any time during 2022. Any borrowings will mature two years from the date of borrowing. c. Noncallable 12% bonds with a face amount of $20 million were issued for S20 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 $12 million 9% 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. Determine the amount for each item a through d, that can be reported as a current liability and as a noncurrent liability. Explain the reasoning behind your classifications. 2. Prepare the liability section of a classified balance sheet and any necessary note disclosure for Nevada Harvester at December 31, 2021. Accounts payable and accruals are $22 million.

Answer 1

Part 1

Scenario	Current Liability Amount($ in millions)
a	$40
b	$6
c	$20
d

Part a

The debt callable by the next creditor in the upcoming year, it is classified as a current liability. Therefore, $40 is a classified as a current liability.

Part b

Short-term obligations that are not going to be refinanced with long-term obligations are treated as noncurrent liabilities but the firm is required to have an unconditional right to defer payment at the financial year-end. Long term refinancing is possible either due through refinancing agreement or by actual financing and the counterparty at the financial year-end is required to the same. However in the given case the counterparty is different. Thus, the liability is treated as the short-term liability.

Part c

The amount is payable in the upcoming year and it is not going to be refinanced with long-term obligations.

Part d

There are situations in which due to the violation of any provision of the debt agreement, the creditor has the right to demand payment. Or,

There are situations in which due to the violation of any provision of the debt agreement, debt is not yet callable but may be callable in a time of a year if violation is not corrected in given specified period.

In the given situation is likely to be corrected in the period of 6 months.

Part 2

NEVADA HARVESTER CORPORATION Balance Sheet (partial) At December 31, 2021
Current Liabilities
Accounts payable and accruals		22
10% notes payable due May 2022		6
Currently maturing portion of long-term debt:
11% bonds due October 31, 2032 redeemable on October 31, 2012	40
12% Bonds due September 30, 2022	20	60
Total Current Liabilities		88
Long-Term Debt
Currently maturing debt classified as long-term:
9% bank loan due October 2027	12
Total Long-term Liabilities		12
Total Liabilities		$100.00

Debt that is callable by the creditor in the upcoming year is classified as a current liability.