Question

3

The balance sheet at December 31, 2018, for Nevada Harvester Corporation includes the liabilities listed below: a. 8% bonds with a face amount of $50 million were issued for $50 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 $50 million. Market conditions are such that the call is not expected to be exercised. b. Management intended to refinance $8.4 million of its 9% 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 $4.2 million any time during 2019. Any borrowings will mature two years from the date of borrowing. c. Noncallable 7% bonds with a face amount of $23.0 million were issued for $23.0 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. d. A $17 million 9% 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 $27 million.

Answer 1

Requirement 1

a.

Maturing debt is to be classified as current liability as it is callable by credited in coming year, even if not expected. Hence, entire $ 50 million is to be classified as current liability.

b.

The current obligation which can be refinanced as long term obligation can be treated as non-current liability. The company has intended to refinance the loan as long term basis and has also shown the ability to refinance it on long term basis. However, the amount of 8.4-4.2 = $ 4.2 million seems only to be refinanced. Hence, $ 4.2 million shall be classified as current liability.

c.

The company has no intention to refinance the bond and it is to mature on September 30,2019. Hence, entire $ 23 million shall be classified as current liability as it is payable in the coming year.

d.

The entire $ 17 million is long term liability as it is not payable in the next year. Although terms has been violated temporarily, the current ratio of 1.7 is to be quickly reestablished within 3 months. Hence, amount to be reported as current liability here shall be “0”.

Requirement 2

Liability Section

Particulars	Amount ($)
Accounts payable and accruals	27,000,000
8% bonds payable on Oct 31,2019	50,000,000
9% notes payable	4,200,000
7% non-callable bonds	23,000,000
Current liabilities	104,200,000
9% notes payable	4,200,000
9% bank loan	17,000,000
Non-current liabilities	21,200,000
Total liabilities	$ 125,400,000