[zf51786]

Becker Question –

Hello I saw two questions in the liabilities section (see Below)… They seem to contradict each other… what is the rule for reclassifying a liability as current to non-current if it will be refinanced to another category after year end but before Financial statement issuance? See below for Question 1 and 2 which seem to contradict each other. Please Help!!! Thanks.

Willem Co. reported the following liabilities at December 31, Year 1:
Accounts payable-trade $ 750,000
Short-term borrowings 400,000
Mortgage payable, current portion $100,000 3,500,000
Other bank loan, matures June 30, Year 2 1,000,000

The $1,000,000 bank loan was refinanced with a 20-year loan on January 15, Year 2, with the first principal payment due January 15, Year 3. Willem’s audited financial statements were issued February 28, Year 2. What amount should Willem report as current liabilities at December 31, Year 1?
a. $1,250,000
b. $2,250,000
c. $1,150,000
d. $850,000

Explanation
Choice “a” is correct. Current liabilities at December 31, Year 1 include the accounts payable-trade of $750,000, the short-term borrowings of $400,000 and the $100,000 current portion of the mortgage payable, for a total of $1,250,000. The $1,000,000 bank loan will not be classified as a current liability because the company refinanced the loan on a long-term basis on January 15, Year 2, prior to the issuance of the financial statements on February 28, Year 2.

Question #2:

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?
a. Current liabilities of $130,000.
b. Current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan.
c. Current liabilities of $30,000, long-term liabilities of $100,000.
d. Long-term liabilities of $130,000.

Explanation
Choice “c” is correct. The $30,000 account payable will be reported as a current liability. The $100,000 short-term construction loan will be reported as a long-term liability because the company refinanced the liability on a long-term basis prior to the issuance of the financial statements.

 

 

[Spartans92]

Both loan were refinanced before the issuance of the financials on a long term basis. Hence, it should be classified as a LT liability. I don't see anything contradicting each other..

BEC- PASS

[nib]

@ zf51786

1) 1st mcq ,

yr end =December 31, Year 1
January 15, Year 2, new 20-year loan refinanced
Feb28, Yr 2, Willem's audited f/s were issued

so refinancing of loan after year end and before f/s issued .so considered long term .

2) 2 nd mcq

after year end but before issuance of f/s = The loan was refinanced through issuance of long-term bonds

so refinancing of loan after year end and before f/s issued .so considered long term .

[Author]

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