Question

The balance sheet at December 31, 2021, for Nevada Harvester Corporation includes the liabilities listed below: a. 9% bonds with a face amount of $53 million were issued for $53 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 $53 million. Market conditions are such that the call is not expected to be exercised. b. Management intended to refinance $12.6 million of its 9% 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 $5.6 million any time during 2022. Any borrowings will mature two years from the date of borrowing. c. Noncallable 8% bonds with a face amount of $270 million were issued for $27.0 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 $20 million 6% 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 $17 million. Complete this question by entering your answers in the tabs below. Required 1 Required 2 For each liability listed above, what amount will be reported as a current liability and as a noncurrent liability on the December 31, 2021 balance sheet? (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) ($ in millions) Current Noncurrent Scenario Liability

Answer 1

Answers:

Required 1:

Scenario	Current Liability Amount ($ in millions)
a.	$53.00
b.	$7.00
c.	$27.00
d.	0

Explanation:

a. The need to classify now maturing debt as a current liability includes debt that is callable by creditor in the coming year, even though the debt is'nt expected to be called. Hence, the total $53.0 million debt is a current liability.

b. $5.6 million could be reported as long term liability, but $7 million must be reported as current liability. Short term obligations which are could be refinanced with long term obligations can be reported as noncurrent liabilities only if the firm plans to refinance on long term basis and has demonstrated the ability to do that. The refinancing agreement helps to demonstate the ability to refinance so the agreement in here limits the ability to refinance to $5.6 million of notes.And there is no evdience to refinance the remaining $7 million. Hence, cant be reported as long term.

c. The total $27.0 million maturity amount need to be reported as a current liability as that amount is payable in coming year and it wont be refinanced with long term obligations.

d. The total $20.0 million loan need to be reported as long term liability as the amount is payable in 2027. Also it wont be refinanced with long term obligations. The current liability classification includes situations where creditor has the right to demand the payment because an existing violation of a provision of the debt agreement makes it callable and situations where debt is not yet callable, but will be callable within the year if an existing violation is not corrected within specified grace period unless it is probable that the violation will be corrected within the grace period. Here, the existing violation is expected to be corrected within six months.

Required 2:

NEVADA HARVESTER CORPORATION
Balance Sheet (partial)
At December 31, 2021
		($ in millions)
Current Liabilities
Accounts payable and accruals*		$17.00
9% notes payable due May 2022		$7.00
Currently maturing portion of long-term debt:
9% bonds due October 31, 2032 redeemable on October 31, 2022	$53.00
8% Bonds due September 30, 2022	$27.00	$80.00
Total Current Liabilities		$104.00
Long-Term Debt
Currently maturing debt classified as long-term:
9% notes payable due May 2022		5.6
6% bank loan due October 2027		20
Total Long-term Liabilities		25.6
Total Liabilities		$129.60

Notes:

*Accounts payable and accruals are given in question as 17 million.

Rest of current liabilities and long term liabilities are explained in required 1.