[Anonymous]

This is from Wiley:

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?

A: $0

B: $100,000

C: $400,000

D: $500,000

Answer A is incorrect because only $400,000 may be reclassified.

Answer B is correct. The requirement is to determine the amount of short-term liability that should be presented on the balance sheet. ASC 470-10-45-14 allows classification of short-term liabilities expected to be refinanced to be classified as noncurrent assuming that the short-term liabilities do not arise from the normal course of business (e.g., accounts payable and accrued liabilities). Therefore answer B is correct because the $400,000 may be reclassified as noncurrent.

Answer C is incorrect because this is the amount that is reclassified as noncurrent.

Answer D is incorrect because $400,000 of the $500,000 in short-term obligation may be reclassified as noncurrent.

My twist:

What if the stock was issued after the financials? Does that change the abilty/intent and then the entire $500,000 would still be noncurrent liability? Would they have to disclose the intent then?

[evaianos]

CPAWannaBe

Companies try to reclasify the short term liabilities in order to improve their curent ratio. They are allow to reclasify the short term liabilities to long term liabilities only if they have the ability and intention to pay all or portion from short term liabilities before financials are issued. After financials are issued they can't reclasify anything. Hope this help

[Anonymous]

Thanks, evaianos. That's what I thought but wanted another opinion.

[FARbehind]

What if the board of directors approved the transaction before the financial statements were issued? Intent is shown and ability is shown because no one can prevent the company to issue stock. Plus the transaction is already approved.

aud,bec,reg-passed
far-->75 Done!!!!!
ethics-100

[evaianos]

Yes FARbehind, I can share my opinion with you regarding this issue, but I know that me, you, and CPAWannaBe don't need to know this anymore because all three of us will get a passing score this year.

[Author]

Replies