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yukagin
Contributor

Joined: 03 Jun 2010
Online Status: Offline
Posts: 84

Posted: 06 Feb 2011 at 02:00 \| IP Logged

F4 refinancing debt to long-term...why does the 250K get
recorded as short-term if they paid for it? I understand
how the 500K is moved to Long-Term liability because they
refinanced it before the issuance of financials.

Question
On December 31, Year 1, Largo, Inc. had a $750,000 note
payable outstanding, due July 31, Year 2. 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 January 12, Year 2. In February
Year 2, 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 Year 2. On March 3, Year 2, Largo issued
its Year 1 financial statements. What amount of the
note payable should Largo include in the current
liabilities section of its December 31, Year 1, balance
sheet?

a.$750,000
b.$500,000
c.$250,000
d.$0

Explanation
Choice "c" is correct. Short-term debt that is expected
to be refinanced is classified as long-term to the extent
of post-balance sheet refinancing. Support must exist
for the refinancing. The $250,000 was paid prior to
refinancing and should be included as a current
liability. Choice "a" is incorrect. The $750,000 is
expected to be refinanced with long-term bonds. The
bonds were issued prior to issuance of the financial
statements, so the $500,000 outstanding can be classified
as long-term. Choice "b" is incorrect. The $750,000 is
expected to be refinanced with long-term bonds. The
bonds were issued prior to issuance of the financial
statements, so the $500,000 outstanding can be classified
as long-term. Choice "d" is incorrect. The $500,000
meets the criteria for refinancing on a long-term basis
and is therefore not a current liability. The
$250,000 was paid prior to refinancing and is classified
at year-end as a current liability.

__________________
REG82,BEC79,FAR 5/31/11 (waiting)

KIJ2011
Newbie
Newbie

Joined: 17 Jan 2011
Online Status: Offline
Posts: 44

Posted: 06 Feb 2011 at 07:36 \| IP Logged

The $250K was paid on January 12, Year 2, after the cutoff date of December 31, Year 1. Since it wasn't paid before the year end, it has to be a liability, but since the refinancing would used to pay only $500K, the $250K is considered short-term liability. Therefore, only the $500K, which would be paid from the refinancing, would be long-term.

Thanks for this question.

__________________
FAR: 4/20
REG: 4/21
AUD: 4/22
BEC: 4/19
Montana (NASBA)

Wish me luck.

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