. At December 31, 2016, Cordova Leather’s liabilities included the following: (a
ID: 2475974 • Letter: #
Question
. At December 31, 2016, Cordova Leather’s liabilities included the following: (a) $15 million of noncallable, 9% notes that were issued for $15 million on August 1, 2007. The notes mature on July 31, 2017. Sufficient cash is expected to be available to retire the notes at maturity. (b) $30 million of 8% notes that were issued for $30 million on May 31, 2012. The notes mature on May 31, 2022, but investors have the option of calling (demanding payment) the notes on June 30, 2017. However, the call option is not expected to be exercised, given prevailing market conditions. (c) $18 million of 10% notes are due on March 31, 2018. A debt covenant requires Cordova to maintain current assets of at least 150% of its current liabilities. On December 31, 2016, Cordova is in violation of this covenant. Cordova obtained a waiver from Village Bank until June 2017, having convinced the bank that the company’s normal 2 to 1 current ratio will be reestablished during the first half of 2017.
Explanation / Answer
Solution:
The debt should be reported as a current liability because it Is paid in the coming year, it will be financed again with long term obligations and will not be paid from sinking fund.
2. Current liability: $30 million
It classifies current maturing debt as a current liability that includes debt callable by creditor in the coming year – even if it is not anticipated to be called.
3. Noncurrent liability: $18 million
The current liability includes a) situation in which creditor has right to make payment because existing violation of a provision of the debt agreement making it callable and b) situation where debt is non-callable but will be callable within the year in existing violation is incorrect within a specific time period. The existing violation is to be corrected within 6 months.
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