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Topic
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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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