Question

At December 31, 2011, Newman Engineering’s liabilities include the following:1. $10 million of 9% bonds were issued for $10 million on May 31, 1988. The bonds mature on May 31, 2022, but bondholders have the option of calling (demanding payment on) the bonds on May 31, 2012. 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, 2015. A debt covenant requires Newman to maintain current assets at least equal to 175% of its current liabilities. On December 31, 2011, Newman is in violation of this covenant. Newman obtained a waiver from National City Bank until June 2012, 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 2012.3. $7 million of 11% bonds were issued for $7 million on August 31, 1978. The bonds mature on July 31, 2012. Sufficient cash is expected to be available to retire the bonds at maturity.Required:What portion of the debt can be reported as a noncurrent liability?

Answer 1

total long term debt: 24,000,000

Step-by-step explanation:

the 1988 bonds will be long-term debt as there is no suggestion to the option to be exercised.

The 1978 bonds will be current liabilities as they matures at 2012

which is within the twelve months time period to be classified as current laibily.

the note payable has an agreement with the bank to not claim it at least until June 2012 The most probable reason is that the 1978 bonds are generating this situation, so once they are retired the normal 2 to 1 ratio will be acomplished, so the note payable will be kept at long term debt

but a note tothe financial statemtn should be made

Long term debt:

1988 bonds: 10,000,000

note payable 14,000,000

total 24,000,000