301538 Flashcards
Notes Payable
A note payable is a contractual right to pay a certain sum of money on fixed or determinable dates at a fixed rate of interest. It is a formal and unconditional written agreement. Notes payable may be interest-bearing or noninterest-bearing; however, even “noninterest-bearing” notes have an interest element included in the face amount of the note.
Cali, Inc., had a $4,000,000 note payable due on March 15 of the current year. On January 28 of the current year, before the issuance of its prior-year financial statements, Cali issued long-term bonds in the amount of $4,500,000. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its prior-year December 31 financial statements?
As a noncurrent liability, with separate disclosure of the note refinancing
As a noncurrent liability, with no separate disclosure required
As a current liability, with separate disclosure of the note refinancing
As a current liability, with no separate disclosure required
As a noncurrent liability, with separate disclosure of the note refinancing
When a debt that is due within the next 12 months is refinanced (repaid with the proceeds of a long-term debt) after the balance sheet date, but prior to balance sheet issuance, the debt that was due in 12 months can be classified as a noncurrent liability, as long as the refinance was intended by management as of the balance sheet date. A disclosure of the details is required in the footnotes to the balance sheet.
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.
2271.04
Refinancing a short-term obligation on a long-term basis means:
a. replacing it with a long-term obligation or equity securities or
b. renewing, extending, or replacing it with short-term obligations for an uninterrupted period extending beyond one year (or the operating cycle, if applicable) from the date of an enterprise’s balance sheet.
2271.05
The ability to consummate the refinancing may be demonstrated in either of the following two ways:
- By actual issuance of a long-term obligation or equity security after the balance sheet date, but before the balance sheet is issued, for the purpose of refinancing the short-term obligation
- By entering into a financing agreement, before the balance sheet is issued, that clearly permits the enterprise to refinance the short-term obligation on a long-term basis on terms that are readily determinable
In the latter case (financing agreement), the following conditions must also be met:
a. The agreement does not expire within one year (or operating cycle, if applicable) from the enterprise’s balance sheet date, and during that period the agreement is not cancelable by the lender except for violation of a provision with which compliance is objectively determinable or measurable.
b. No violation of any provision in the agreement exists prior to the issuance of the balance sheet or, if one exists, a waiver has been obtained.
c. The lender is expected to be financially capable of honoring the agreement.
FASB ASC 470-10-45-14
