Question

For the following liabilities of a company, determine the amount to be reported as a current and as a non-current liability, if applicable, on the company’s December 31, 2021 balance sheet.  Indicate your reason for your answers and the necessary footnote disclosure:

1.  The company issued $40,000,000 of 11% bonds at par on October 31, 2012, with a maturity date of 2032.  The bondholders can require early payment of the bonds on October 31, 2022, at par.  It is not expected that they will exercise this feature.

2.  The company negotiated a $5 million line of credit with the bank in 2021 with a two-year maturity date.

3.  Bonds were issued for $20 million in 2002 with a maturity date of September 30, 2022.

4.  The company has a bank loan of $12 million due in 2027.  As a condition of the loan, the bank can demand payment in full anytime that the company’s working capital ratio is below a certain amount for a period of six months.  At December 31, 2021, the ratio was below this amount.

Answer 1

Liabilities are to be classified as current if any one of four specified conditions is met. The conditions are:

a) It expects to settle the liability in its current operating cycle

b) It holds the liability primarily for trading

c) The liability is due to be settled within 12 months

d) It does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

Answers:

1. 11% $ 40,000,000 should classify as non - current liability because exercising early payment options not expected.

2. $ 5million line of credit with bank classified as non current liability.

3. Bond of $20 million with a maturity date in September 30,2022 should be classified as current liability.

4. Bank loan of $ 12 million should be classified as current liability because the ratio comes under the limit (below the amount) specified, hence bank will demand repayment in full at anytime.