At December 31, 2016, Cordova Leather’s liabilities include the following: 1 $15

Question

At December 31, 2016, 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, 2017. 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, 2012. The notes mature on May 31, 2022, but investors have the option of calling (demanding payment on) the notes on June 30, 2017. 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, 2018. A debt covenant requires Cordova to maintain current assets at least equal to 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 ratio of current assets to current liabilities will be reestablished during the first half of 2017.

Required: For each of the three liabilities, indicate the portion of the debt that can be excluded from classification as a current liability

Explanation / Answer

1. The Current Liability in this case will be $15 million. The debt is due within 12 months of closing date and there is sufficient fund to fund the repayment and no intention of refinancing into a Long term fund, so the Loan will be treated as Current Laibility.No part of the Note will be Non current.

2. The current Laibility will be $30 Million. Though the Note is not maturing in 12 months from the current closing date, there is a provision in the long term debt that gives the investors the calling option within 12 months of the current closing period. Therefore, the bond will be treated as current liability though the calling option is not probable to be exercised. No part of the Note will be Non current.

3. The $18 Million loan will be classified as Non Current. A Non Current Loan can be classified as Current only when there is a breach of provision of loan taht makes the Loan callable or there is a situation wheer the Loan is not callable but if some exisiting violation of provision not corrected withing 12 month sof reporting period the Loan will become callable.

Here there is a violation of agrrement , but is is prbable that the violation will be rectified within 6 months of closing period. So the Loan will be traeted as Non Current.

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