CFA Practice Question
On January 3, 2008, Jupiter Company issued long-term bonds due January 3, 2013. The bond covenant includes a call provision that is effective if the firm's current ratio falls below 2:1. On June 30, 2008, the fiscal year-end for the company, its current ratio was 1.5:1. The bonds should be reported on the financial statements as a
A. current liability if the covenant violation is not cured.
B. current liability, regardless of any action by the bondholder, because the company was in violation of the covenant on the balance sheet date.
C. long-term debt if it is reasonably possible that Jupiter can cure the covenant violation before the end of any allowed grace period.
Explanation: Long-term obligations that are callable by the creditor because of the debtor's violation of the debt agreement at the balance sheet date shall be classified as current liabilities if the covenant violation is not cured (between the balance sheet date and financial statements preparation date).
User Contributed Comments 3
| User | Comment |
|---|---|
| jamiejamie | isn't the term "putable" used in relation to the creditor? |
| mpapwa22 | What is cured? i think i know but just to be sure. |
| prajacti | "cured" here means getting the current ratio back to 2:1 |