[Troblin]

Hi all,
I have a quick accounting question from work. I figured I’d ask all the future CPAs to see if I could come to some resolution. 

Balance Sheet Presentation for a Secured Line of Credit

My understanding is that a line of credit is an off balance sheet transaction, that only is reported when the line of credit is drawn upon.
When the line of credit is drawn upon, the following journal entry is reported:

Cash XXXXXX
Line of Credit Liability XXXXX

Scenario:
Company XYZ has a $1,000,000 secured line of credit. Company XYZ is securing this line of credit is with a $1,000,000 Certificate of Deposit that the company has reported on their Balance Sheet. Company XYZ decides to draw $500,000 on the Secured Line of Credit. What would be the proper balance sheet presentation for this?

My understanding is as follows:
Prior to drawing on the line of credit, Company XYZ would report the $1,000,000 Certificate of Deposit on their Balance Sheet.

Company XYZ
Balance Sheet

Assets
Short Term Investments(CD) – $1,000,000

After drawing on the line of credit, the presentation would be as follows:

Company XYZ
Balance Sheet

Assets
Cash – $500,000
Short Term Investments(CD) – $1,000,000

Liabilities
Line of Credit Liability – $500,000

Is there any rule regarding a reduction to Cash/Cash Equivalents used to secure a line of credit, when the line of credit is drawn up? It seems like this is an inflation of the entities true cash position. Any help(Codification/Interpretations/Thoughts) would be appreciated. Thanks!!

FAR: 85(11/22/2014) - Becker(full)/Ninja MCQ (5 day cram)
AUD: 79 (2/1/2015) -Becker/Ninja MCQ/Ninja Notes
REG: 84(4/19/2015) -Becker/Ninja MCQ/Ninja Notes
BEC: 83 (7/13/2015) -Becker/Ninja MCQ/Ninja Notes

Date I Got My Life Back!: 8/4/2015 🙂

[wombataholic]

I think you have to disclose in the notes to the financial statements that the CD was being used to secure a line of credit. I could be wrong though.

Licensed CPA
Passed each section on the first try with Ninja Notes/MCQ/Audio

[supergirl]

I believe you are correct but wombataholic said, you generally disclose in the notes to the financial statements that XYZ Company has a line of credit with a financial institution, bearing interest at _%. You usually also include the outstanding balance and that the line is secured by a certificate of deposit, company's receivables, etc. This is at least what I've seen before…

[Forem004]

Correct super girl, I actually just finished an audit and prepared financials with exactly that.

[Author]

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