Refinancing Question

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  • #194101
    Oimie
    Member

    NINJA Question –

    Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?

    Answer is 100,000.

    Explanation FASB ASC 470-10-45-14 requires that short-term obligations be reported as long-term liabilities if a company (1) intends to refinance the short-term obligation on a long-term basis and (2) demonstrates the ability to refinance it a long-term basis. The intent is stated in the problem. Verona’s issuance of common stock for $400,000 before the statements were issued demonstrates the ability to refinance $400,000 of the short-term obligations on a long-term basis. The balance of the obligation ($100,000) must be reported as a current liability.

    My question is how is issuing stock considered “refinancing the 400,000 on a long term basis”? I thought refinancing is only considered refinancing when debt is issued to pay back another debt. Normally that’s the type of MCQs I get and the current liability get’s reclassified to non current liability because the new debt doesn’t have to be paid off within the year. To me this looks more like raising capital, and then paying it off.

    FAR 85 June 2015
    AUD 80 Nov 2015
    REG 83 Nov 2015
    BEC 79 Feb 2016

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  • #666133
    MaLoTu
    Participant

    I guess because it is paying off the amount due in less than one year. I think that it is considered refinancing because it states that the money will be used to pay off that debt, however, they will not incur another LT liability in its place. “Refinance” means to finance again (I guess you can say), in this case the funds to finance the short term debt were from raising capital through stock.

    There could be more to and I could be wrong! lol

    #666134
    Thrawn
    Participant

    equity is a form of financing with an unlimited life. so sure its refinanced on a basis that need not be paid during 1 year.

    BEC 87 Feb 14
    REG 84 Apr 14
    FAR 82 Nov 14
    AUD 86 Feb 15

    #666135
    Oimie
    Member

    I see. Thank you guys. 🙂

    FAR 85 June 2015
    AUD 80 Nov 2015
    REG 83 Nov 2015
    BEC 79 Feb 2016

Viewing 3 replies - 1 through 3 (of 3 total)
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