300497 Current Assets and Liabilities 2G Flashcards
On December 31, 20X1, Paxton Co. had a note payable due on August 1, 20X2. On January 20, 20X2, 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, 20X2, 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, 20X2. How should Paxton classify the note on its balance sheet at December 31, 20X1?
As a current liability because the lender is not expected to be financially capable of honoring the agreement
As a long-term liability because the agreement does not expire within one year
As a long-term liability because no violation of any provision in the financing agreement exists
As a current liability because the financing agreement was signed after the balance sheet date
Question #300497
As a current liability because the lender is not expected to be financially capable of honoring the agreement
Correct
Without the agreement to refinance the note payable, the note must be paid within the following year. Consequently, the note payable is a current liability.
Current Assets
Current assets are cash and other assets that can be expected to be used, sold, or converted to cash during the current business cycle, generally one year.
Examples of current assets include cash, raw materials, trade accounts receivable, and marketable securities.
Refinanced
To refinance is to replace existing debt or owner’s equity with new debt or equity, generally for a lower interest rate or more favorable terms. For example, a 20-year, 11% bond issue is called and the called bonds are financed with the proceeds from a new 20-year, 8% bond issue. An issued or preferred stock is called and the called stock is financed with the proceeds from the issuance of common stock.
2271.01
Current liabilities represent obligations whose liquidation is expected to require the use of current assets or the creation of other current liabilities, and include the following:
a. Obligations for items that have entered into the operating cycle
b. Collections received in advance of the delivery of goods or performance of services
c. Debts arising from operations directly related to the operating cycle (e.g., accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes)
d. Other liabilities whose regular and ordinary liquidation is expected to occur within one year or less (e.g., dividends payable, warranty payable, interest payable)
2271.02
Classification of Obligations That Are Callable by the Creditor
In addition to the liabilities defined above, current liabilities also include obligations that are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date. Current liabilities may also include long-term obligations that are or will be callable by the creditor because the debtor has violated a covenant in the debt agreement that either:
a. makes the obligation callable or
b. will make the obligation callable if the violation is not cured within a specified grace period.
If such a violation exists, the related debt must be classified as current unless either:
a. the creditor has waived or, subsequent to the violation, has lost the right to demand payment (e.g., because the violation has been cured) for more than one year (or operating cycle, if longer) from the balance sheet date or
b. it is probable that the violation will be cured within the specified grace period, if one exists.
2271.03
Short-Term Obligations Expected to Be Refinanced
Short-term obligations arising from transactions in the normal course of business that are due in customary terms must be classified as current liabilities. Other short-term obligations may be excluded from current liabilities, but only if the enterprise:
a. intends to refinance the obligation on a long-term basis and
b. demonstrates the ability to consummate the refinancing.
FASB ASC 470-10-45-14
