E135 LO1 Debt Classifications Presented below are four different situations related to Mckee plc debt obligations Mckees next financial reporting date is December 31 2018 The financial statements are authorized for issuance on March 1 2019 1 Mckee has a debt obligation maturing on December 31 2021 The debt is callable on demand by the lender at any time 2 Mckee also has a longterm obligation due on December 1 2020 On November 10 2018 it breaches a covenant on its debt obligation and the loan becomes due on demand An agreement is reached to provide a waiver of the breach on December 8 2018 3 Mckee has a longterm obligation of 400000 which is maturing over 4 years in the amount of 100000 per year The obligation is dated November 1 2018 and the first maturity date is November 1 2019 4 Mckee has a shortterm obligation due February 15 2019 Its lender agrees to extend the maturity date of this loan to February 15 2021 The agreement for extension is signed on January 15 2019 Instructions Indicate how each of these debt obligations is reported on Mckees statement of financial position on December 31 2018 EXERCISE 135 1520 minutes 1 Debt that is callable on demand by the lender at any time should be classified as a current liability The callable on demand feature overrides the stated maturity of December 31 2021 2 When there is a breach of a debt covenant the debt is normally classified as a current liability However if the company is able to obtain a period of grace from the lender prior to the reporting date as Mckee did the agreement was reached on December 8 2018 the debt should be classified as noncurrent 3 Mckee should classify 100000 of the obligation as a current maturity of longterm debt current liability and the 300000 balance as a noncurrent liability 4 While the maturity of the obligation was extended to February 15 2021 the agreement was not reached with the lender until January 15 2019 Since the agreement was not in place as of the reporting date December 31 2018 the obligation should be reported as a current liability