Question

ransit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2021. Transit’s fiscal year ends on December 31. Its annual financial statements are issued in April. Transit has outstanding 6.0% bonds with a face amount of $60 million. The bonds mature on July 31, 2027. Bondholders have the option of calling (demanding payment on) the bonds on July 31, 2022, at a redemption price of $60 million. Market conditions are such that the call option is not expected to be exercised. A $38 million 4% bank loan is payable on October 31, 2024. The bank has the right to demand payment after any fiscal year-end in which Transit’s ratio of current assets to current liabilities falls below a contractual minimum of 1.9 to 1 and remains so for six months. That ratio was 1.75 on December 31, 2021, due primarily to an intentional temporary decline in parts inventories. Normal inventory levels will be reestablished during the sixth week of 2022. Transit management intended to refinance $24 million of 5% notes that mature in May 2022. In late February 2022, prior to the issuance of the 2021 financial statements, Transit negotiated a line of credit with a commercial bank for up to $19 million any time during 2022. Any borrowings will mature two years from the date of borrowing. Transit is involved in a lawsuit resulting from a dispute with a food caterer. On February 13, 2022, judgment was rendered against Transit in the amount of $61 million plus interest, a total of $62 million. Transit plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company. Required: 1. How should the 6.0% bonds be classified by Transit among liabilities in its balance sheet? 2. How should the 4% bank loan be classified by Transit among liabilities in its balance sheet? 3. How should the 5% notes be classified by Transit among liabilities in its balance sheet? 4. How should the lawsuit be reported by Transit? 5. Calculate the total current liabilities, total long-term liabilities, and total liabilities of a classified balance sheet for Transit Airlines at December 31, 2021. Transit's accounts payable and accruals were $48 million.

Answer 1

Below table is the desired result: -

Outstanding bonds Interest	6%
Face value	60
Classified as	Current Liability	Payment is made on demand and in case of payment period is less than a year it becomes current liability	Amount to be recorded	60
Redemption price	60			Redemption price
Bank loan	38
Interest rate	4%
Classified as	Long term liability	Payment made after 1 year and hence it is a long-term liability	Amount to be recorded	38
Refinance	24			Loan amount
Classified as	Current Liability	Because maturity period is less than a year	Amount to be recorded	5
Notes interest rate	5%			24-19
Line of Credit	19
Classified as	Long Term Liability	Because maturity period is of two years	Amount to be recorded	19
Lawsuit amount	61			Line of Credit
Interest	1
Disclosure note should be provided	as this suit is in appeal and shall not be considered probable
Accounts payable and accruals	48
Total Current Liabilities	113	48+60+5
Long term Debt	57	38+19
Total Liabilities	170	113+57