Question

Problem 13-3 Current-noncurrent classification of debt [LO13-1, 13-4]

The balance sheet at December 31, 2018, for Nevada Harvester Corporation includes the liabilities listed below:

1. 12% bonds with a face amount of $37 million were issued for $37 million on October 31, 2009. The bonds mature on October 31, 2029. Bondholders have the option of calling (demanding payment on) the bonds on October 31, 2019, at a redemption price of $37 million. Market conditions are such that the call is not expected to be exercised.
2. Management intended to refinance $11.7 million of its 15% notes that mature in May 2019. In early March, prior to the actual issuance of the 2018 financial statements, Nevada Harvester negotiated a line of credit with a commercial bank for up to $5.5 million any time during 2019. Any borrowings will mature two years from the date of borrowing.
3. Noncallable 14% bonds with a face amount of $22.0 million were issued for $22.0 million on September 30, 1996. The bonds mature on September 30, 2019. Sufficient cash is expected to be available to retire the bonds at maturity.
4. A $8 million 12% bank loan is payable on October 31, 2024. 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, 2018, due primarily to an intentional temporary decline in inventory levels. Normal inventory levels will be reestablished during the first quarter of 2019.

Required:
1. For each liability listed above, what amount will be reported as a current liability on the December 31, 2018 balance sheet?
2. Prepare the liability section of a classified balance sheet for Nevada Harvester at December 31, 2018. Accounts payable and accruals are $21 million.
  

Answer 1

Part 1)

The amount that will be reported as liability on the December 31, 2018 balance sheet for each liability listed above is given below:

Scenario	Current Liability Amount (in Millions)	Explanation
a.	$37	Any amount of debt that is callable by the creditors in the coming year (even if it is not expected to be called) will get reported as currently liability as per the requirements to classify currently maturing debt as a current liability.
b.	$6.2	Out of $11.7 million, $6.2 million (11.7 - 5.5) will get reported as current liability. $5.5 million can be reported as long term liability. As per the applicable rules, only that portion of short tem obligations that cannot be refinanced with the use of financing agreement can be treated as current liability. In the given scenario, only $5.5 million short term obligations can be refinanced with the use of financing agreement and will therefore, not be treated as current liability or will be treated as long term liability.
c.	$22	The total value of $22 million will get reported as current liability because the entire amount is payable in 2019 (that is, in the coming year). Further, this amount will not get refinanced with long -term obligations.
d.	$0	The total value of $8 million be treated as long trem liability as it is payable in the year 2024. Further, this amount will not get refinanced with long -term obligations.

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Part 2)

The liability section of a classified balance sheet for Nevada Harvester at December 31, 2018 is prepared as below:

Nevada Harvester Corporation
Balance Sheet (Partial)
At December 31, 2018
		(in millions)
Current Liabilities
Accounts Payable and Accruals		21.0
15% Notes Payable due May, 2019		6.2
Currently Maturing Portion of Long Term Debt:
12% Bonds due October 31, 2029 Redeemable on October 31, 2019	37
14% Bonds due September 30, 2019	22	59.0
Total Current Liabilities		86.2
Long Term Debt
15% Notes Payable due May, 2019		5.5
12% Bank Loan due October 31, 2024		8.0
Total Long Term Liabilities		13.5
Total Liabilities		$99.7