Transit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2016. Transit’s fiscal year ends on December 31. Its annual financial statements are issued in April. 1. Transit has outstanding 6.5% bonds with a face amount of $90 million. The bonds mature on July 31, 2025. Bondholders have the option of calling (demanding payment on) the bonds on July 31, 2017, at a redemption price of $90 million. Market conditions are such that the call option is not expected to be exercised. 2. A $30 million 8% bank loan is payable on October 31, 2022. The bank has the right to demand payment after any fiscal year-end in which Transit’s ratio of current assets to current liabilities falls below a contractual minimum of 1.9 to 1 and remains so for 6 months. That ratio was 1.75 on December 31, 2016, due primarily to an intentional temporary decline in parts inventories. Normal inventory levels will be reestablished during the sixth week of 2017. 3. Transit management intended to refinance $45 million of 7% notes that mature in May of 2017. In late February 2017, prior to the issuance of the 2016 financial statements, Transit negotiated a line of credit with a commercial bank for up to $40 million any time during 2017. Any borrowings will mature two years from the date of borrowing. 4. Transit is involved in a lawsuit resulting from a dispute with a food caterer. On February 13, 2017, judgment was rendered against Transit in the amount of $53 million plus interest, a total of $54 million. Transit plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company. Required: 1. How should the 6.5% bonds be classified by Transit among liabilities in its balance sheet? Explain. 2. How should the 8% bank loan be classified by Transit among liabilities in its balance sheet? Explain. 3. How should the 7% notes be classified by Transit among liabilities in its balance sheet? Explain. 4. How should the lawsuit be reported by Transit? Explain. 5. Prepare the liability section of a classified balance sheet for Transit Airlines at December 31, 2016. Transit’s accounts payable and accruals were $43 million. 6. Draft appropriate note disclosures for Transit’s financial statements at December 31, 2016, for each of the five items described.