Transit Airlines provides regional jet service in the Mid-South.The following is information on liabilities of Transit at December31, 2018. Transit’s fiscal year ends on December 31. Its annualfinancial statements are issued in April.
1. Transit has outstanding 7.6% bonds with a face amount of $79million. The bonds mature on July 31, 2027. Bondholders have theoption of calling (demanding payment on) the bonds on July 31,2019, at a redemption price of $79 million. Market conditions aresuch that the call option is not expected to be exercised.
2. A $21 million 9% bank loan is payable on October 31, 2024.The bank has the right to demand payment after any fiscal year-endin which Transit’s ratio of current assets to current liabilitiesfalls below a contractual minimum of 1.9 to 1 and remains so for 6months. That ratio was 1.75 on December 31, 2018, due primarily toan intentional temporary decline in parts inventories. Normalinventory levels will be reestablished during the sixth week of2019.
3. Transit management intended to refinance $42 million of 7%notes that mature in May of 2019. In late February 2019, prior tothe issuance of the 2018 financial statements, Transit negotiated aline of credit with a commercial bank for up to $38 million anytime during 2019. Any borrowings will mature two years from thedate of borrowing.
4. Transit is involved in a lawsuit resulting from a disputewith a food caterer. On February 13, 2019, judgment was renderedagainst Transit in the amount of $48 million plus interest, a totalof $49 million. Transit plans to appeal the judgment and is unableto predict its outcome though it is not expected to have a materialadverse effect on the company.
Required: 1. How should the 7.6% bonds be classified by Transitamong liabilities in its balance sheet?
2. How should the 9% bank loan be classified by Transit amongliabilities in its balance sheet?
3. How should the 7% notes be classified by Transit amongliabilities in its balance sheet? 4. How should the lawsuit bereported by Transit?
5. Calculate the total current liabilities, total long-termliabilities, and total liabilities of a classified balance sheetfor Transit Airlines at December 31, 2018. Transit's accountspayable and accruals were $53 million.
Complete this question by entering your answers in thetabs below.
How should the 7.6% bonds, 9% bank loan and 7% notes beclassified by Transit among liabilities in its balance sheet. Howshould the lawsuit be reported by Transit? (Enter your answers inmillions.)
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| | | | | | 1 | | | million | | 2 | | | million | | 3 | | | million | | | | million | | 4 | The lawsuit should bereported as: |
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Calculate the total current liabilities, total long-termliabilities, and total liabilities of a classified balance sheetfor Transit Airlines at December 31, 2018. Transit's accountspayable and accruals were $53 million. (Enter your answers inmillions.)
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| | | | | Total current liabilities | | million | | Total long-term liabilities | | million | | Total liabilities | | million |
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