Question

At December 31, 2018, company’s liabilities included the following:

a. $6 million of outstanding bonds that mature in 2025, but which are currently callable by bondholders. However, because current market interest rates are much higher than the coupon rate on the bonds, the bondholders are not expected to exercise the call option.

b. A $2 million mortgage on its manufacturing building, which is due in June of 2019. However, on January 28th, before the issuance of 2018 financial statements, Oldman refinanced this mortgage by making a down payment of $400k and taking out a new mortgage for $1.6 million.

c. A $1.2 million note payable from the company’s bank which is due on March 31, 2019. The note is secured by the company’s inventory and accounts receivable. The company expects to refinance this note, but has not yet started the process to do so.

For each of the liabilities above, show how the amount would be classified in the December 2018 balance sheet:

Current Liability   Non-Current Liability

a

b

c

Answer 1

a. Current Liability = $0

Non - Current Liability = $6000000

b. Current Liability = $2000000

Non - Current Liability = $0

c. Current Liability = $1200000

Non - Current Liability = $0

in case A the company is sure that the investors will not claim the call option thus the bonds payable is reported under non current liability

in case B the company has not refinanced on December 2018 thus the entire amount is shown as current liability

in case C the company has not reported as Current liability as they secured against accounts receivable and inventory

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