Problem 1-3 (IAA)
On December 31, 2022, Cordillera Company reported the following liabilities:
Note payable - 9%: 3,000,000
Note payable - 8%: 6,000,000
Note payable - 10%: 4,000,000
Note payable - 11%: 5,000,000
The 9% note payable is noncancelable and matures on July 31, 2023. Sufficient cash is expected to be available to retire the note at maturity.
The 8% note payable matures on May 31, 2028, but the creditor has the option of calling the note or demanding payment on June 30, 2023. However, the call option is not expected to be exercised given the prevailing market condition.
The 10% note payable is due on March 31, 2024. A debt covenant requires Cordillera Company to maintain current assets at least equal to 150% of current liabilities. On December 31, 2022, Cordillera Company is in violation of this covenant. However, Cordillera Company obtained a waiver from the creditor until June 2023, having convinced the creditor that Cordillera Company's normal 2 to 1 ratio of current assets to current liabilities shall be reestablished during the first half of 2023.
The 11% note payable matures on June 30, 2023. On January 31, 2023, before the issuance of the 2022 financial statements, the note payable was refinanced on a long-term basis.
Required:
Explain the appropriate classification of the notes payable as current or noncurrent in the statement of financial position on December 31, 2022.
Answer (2)
To determine the appropriate classification of the notes payable as current or noncurrent liabilities on the statement of financial position for Cordillera Company as of December 31, 2022, let's examine each note payable:
9% Note Payable ($3,000,000):
This note matures on July 31, 2023. Given that it matures within one year from the balance sheet date, it should be classified as a current liability.
8% Note Payable ($6,000,000):
Although this note matures in 2028, the creditor has an option to demand payment on June 30, 2023. However, based on prevailing market conditions, this option is not expected to be exercised. Therefore, the note remains a noncurrent liability because the company expects it will not be called.
10% Note Payable ($4,000,000):
This note is due on March 31, 2024. However, a debt covenant is in violation as of December 31, 2022. The company obtained a waiver from the creditor up to June 2023 to correct the covenant breach. This waiver implies that the creditor cannot demand payment until at least June 2023, hence the note remains a noncurrent liability as of December 31, 2022.
11% Note Payable ($5,000,000):
Originally maturing on June 30, 2023, this note was refinanced on a long-term basis before the financial statements were issued, specifically on January 31, 2023. This refinancing with a long-term obligation allows Cordillera Company to classify it as a noncurrent liability.
Summary:
Current Liabilities: 9% Note Payable of $3,000,000
Noncurrent Liabilities: 8% Note Payable of $6,000,000, 10% Note Payable of $4,000,000, 11% Note Payable of $5,000,000
This classification helps show a clear picture of the company’s financial commitments in the short term versus its long-term obligations.
Cordillera Company's 9% note payable is classified as a current liability due to its maturity within a year. The 8% and 10% notes are classified as noncurrent liabilities since they are not expected to require payment in the near term, and the 11% note was refinanced, allowing it to also be noncurrent. This classification provides a clear picture of the company's financial obligations.
;
