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CPAhamster
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| Posted: 21 Nov 2009 at 06:00 | IP Logged
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On Dec 31, 2008, Largo had $750 000 note payable outstanding, due July 31, 2009. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing long term bonds.Because Largo temporarily had excess cash, it prepaid $250 000 of the note on Jan 12, 2009. In Feb 2009, Largo completed a $ 1 500 000 bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2009. On March 3, 2009, Largo issued its 2008 financial statements. What amount of the note payableshould Largo include in the current liabilities section of its Dec 31, 2008 balance sheet?
The answer is 250 000, I am confused why not zero?
Please help, thank you in advance
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Zeratul
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| Posted: 21 Nov 2009 at 10:31 | IP Logged
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It's because after B/S date but before issuance of the financial statement a portion of the long-term liabilities were settled using current assets. Even though you can't recognize the payment (since the liabilities were not paid as of B/S date), you still have to classify the portion which was paid as short-term liabilities, since obviously they were paid within a year of presentation.
This is one of those subsequent events you encounter in both financial accounting and auditing.
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Future CPA
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| Posted: 21 Nov 2009 at 11:41 | IP Logged
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I agree with Zeratul. It's a subsequent event that requires modification to the previous year's balance sheet. How much of the $750,000 did you actually pay in cash from your pocket? $250,000. How much of it did you payback through refinancing it? $500,000. So as a result, $250,000 is your current asset, and the other $500,000 ended up being a long-term liability.
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snehakhabiya
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| Posted: 21 Nov 2009 at 11:45 | IP Logged
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Even though he decided to refinance the note, he made a
payment of 250,000$ before the refinancing of the debt.
The refinancing was done after the issuance of B/S date.
So, he has to recognize the 250,000 in the current
liabilities section and not 750,000$.
If he would not have paid 250K, I think 750K would not be
recorded in current liabilities as he was not planning to
pay it in next operating cycle,
Correct me if I am wrong.
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Zeratul
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| Posted: 21 Nov 2009 at 12:35 | IP Logged
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If he either did nothing or refinanced the entire 750K, there would be no issue. All 750K would be noncurrent liabilities.
Liabilities must be classified as current if the intention is to settle them within one year (or the operating cycle, whichever is longer) with assets (usually current) or a current liability. All other liabilities are noncurrent.
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Topic: Current Liability
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