Chapter 13 - Test Bank 183 - classification as a current...

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123. At December 31, 2013, Cordova Leather's liabilities include the following: 1. $15 million of noncallable 9% notes were issued for $15 million on August 31, 1994. The notes mature on July 31, 2014. Sufficient cash is expected to be available to retire the notes at maturity. 2. $30 million of 8% notes were issued for $30 million on May 31, 2009. The notes mature on May 31, 2019, but investors have the option of calling (demanding payment on) the notes on June 30, 2014. However, the call option is not expected to be exercised, given prevailing market conditions. 3. $18 million of 10% notes are due on March 31, 2015. A debt covenant requires Cordova to maintain current assets at least equal to 150% of its current liabilities. On December 31, 2013, Cordova is in violation of this covenant. Cordova obtained a waiver from Village Bank until June 2014, having convinced the bank that the company's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of 2014. Required: For each of the three liabilities, indicate the portion of the debt that can be excluded from
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Unformatted text preview: classification as a current liability (that is, reported as a noncurrent liability). Explain. 1. Current liability: $15 million The debt should be reported as a current liability because it is payable in the upcoming year, will not be refinanced with long-term obligations, and will not be paid from a sinking fund. 2. Current liability: $30 million The requirement to classify currently maturing debt as a current liability includes debt that is callable by the creditor in the upcoming year—even if the debt is not expected to be called. 3. Noncurrent liability: $18 million The current liability classification includes (a) situations in which the creditor has the right to demand payment because an existing violation of a provision of the debt agreement makes it callable and (b) situations in which debt is not yet callable, but will be callable within the year if an existing violation is not corrected within a specified grace period—unless it's probable the...
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