I don't understand why this note is classified as a current liability on the year 1 balance sheet; Paxton is not aware of the fact that the lender is not expected to be financially capable of honoring the agreement. Are they saying that he will go back and adjust the year 1 balance sheet??
On December 31, Year 1, Paxton Co. had a note payable due on August 1, Year 2. On January 20, Year 2, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, Year 2, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton's financial statements were issued on March 31, Year 2. How should Paxton classify the note on its balance sheet at December 31, Year 1?
a.
As a current liability because the lender is not expected to be financially capable of honoring the agreement.
b.
As a current liability because the financing agreement was signed after the balance sheet date.
c.
As a long-term liability because the agreement does not expire within one year.
d.
As a long-term liability because no violation of any provision in the financing agreement exists.
.