[Anonymous]

Hi All,

Below question is from Wiley FAR on Current liabilities.

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

a. $750,000

b. $500,000

c. $250,000

d. 0

Can anyone help me in understanding this question as well as answer in simple language along with the concept.

Cheers!

Cylie

Happy Studying!

[Anonymous]

I'm not sure why we care about payment in Y3, or why if in Y2 it's not all CL, anyone?

[neaux]

EDIT – I didn't realize this was an old post!

[vodrldnr]

Current liability can be classified into long term liability when manetmegment has the intend and ability to do so. and the maximum amount of long term liability converted from current liability cannot exceed the original amount. It means that only 750K out of 1500k can be classified into long term

There are two material statement in this question and this two stamens make huge difference to get answer.

1. Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, Year 3.
2. On March 3, Year 3, Largo issued its Year 2 financial statements

$250k was paid off before the issuance F/S statement. Therefore, the company have to look back to their F/S and make adjustment about $250K

Since the company has plan and ability to pay off $250k portion out of total longterm portion within in couple of months before issuing F/S, $250k shall be classified as current liability on “”””””Year2″”””‘s F/S.

[Author]

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