Classifying debt
Response to the following problem:
Consider the following liabilities of Future Brands, Inc., at December 31, 2016, the company's fiscal year-end. Should they be reported as current liabilities or long-term liabilities?
1. $77 million of 8% notes are due on May 31, 2020. The notes are callable by the company's bank, beginning March 1, 2017.
2. $102 million of 8% notes are due on May 31, 2021. A debt covenant requires Future to maintain a current ratio (ratio of current assets to current liabilities) of at least 2 to 1. Future is in violation of this requirement but has obtained a waiver from the bank until May 2017, since both companies feel Future will correct the situation during the first half of 2017.