Balance Sheet Flashcards
(Statement of Financial Position)
Verona Co. had $500,000 in current 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 current debt. What amount should Verona report as a current liability on its balance sheet at the end of the current year?
D. $100,000
Answer (D) is correct.
The portion of debt scheduled to mature in the following fiscal year ordinarily should be classified as a current liability. However, if an entity intends to refinance current obligations on a noncurrent basis and demonstrates an ability to consummate the refinancing, the obligation should be excluded from current liabilities and classified as noncurrent. One method of demonstrating the ability to refinance is to issue noncurrent obligations or equity securities after the balance sheet date but before the financial statements are issued. Verona demonstrated an ability to refinance $400,000 of the current liabilities by issuing common stock. Hence, it should report a current liability of $100,000 ($500,000 – $400,000).
