At December 31, 2018, Newman Engineering’s liabilities include the following:1. $10 million of 9% bonds were issued for $10 million on May 31, 1999. The bonds mature on May 31, 2029,but bondholders have the option of calling (demanding payment on) the bonds on May 31, 2019. However,the option to call is not expected to be exercised, given prevailing market conditions.2. $14 million of 8% notes are due on May 31, 2022. A debt covenant requires Newman to maintain currentassets at least equal to 175% of its current liabilities. On December 31, 2018, Newman is in violation of thiscovenant. Newman obtained a waiver from National City Bank until June 2019, having convinced the bankthat the company’s normal 2 to 1 ratio of current assets to current liabilities will be reestablished during thefirst half of 2019.3. $7 million of 11% bonds were issued for $7 million on August 1, 1989. The bonds mature on July 31, 2019.Sufficient cash is expected to be available to retire the bonds at maturity.Required:What portion of the debt can be excluded from classification as a current liability (that is, reported as a noncurrentliability)? Explain.
At December 31, 2018, Newman Engineering’s liabilities include the following:
1. $10 million of 9% bonds were issued for $10 million on May 31, 1999. The bonds mature on May 31, 2029,
but bondholders have the option of calling (demanding payment on) the bonds on May 31, 2019. However,
the option to call is not expected to be exercised, given prevailing market conditions.
2. $14 million of 8% notes are due on May 31, 2022. A debt covenant requires Newman to maintain current
assets at least equal to 175% of its current liabilities. On December 31, 2018, Newman is in violation of this
covenant. Newman obtained a waiver from National City Bank until June 2019, 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 2019.
3. $7 million of 11% bonds were issued for $7 million on August 1, 1989. The bonds mature on July 31, 2019.
Sufficient cash is expected to be available to retire the bonds at maturity.
Required:
What portion of the debt can be excluded from classification as a current liability (that is, reported as a noncurrent
liability)? Explain.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
