Notes and Bonds Payable(Issuance)

Question 1

On November 30, Year One, a company borrows $1 million from a bank on a seven-month note paying an annual stated interest rate of 6 percent (the prime interest rate on that date). When the note comes due on June 30, Year Two, the company pays the bank the interest and refinances the $1 million with a new seven-month note at the current prime rate. The company and the bank continue to follow this pattern for years: The interest is paid every seven months and a new note is signed for $1 million to refinance the principal. On December 31, Year Five, the latest interest payment and note signing take place. Once again, this note is for seven months. The company will issue its Year Five financial statements on March 4, Year Six. Which of the following is true concerning the reporting of this liability at the end of Year Five? f

Answer 1

If the company and the bank sign a non-cancelable agreement on March 1, Year Six that states that the note will continue to be refinanced through the end of Year Six, the company must report the note as a long-term liability.

Question 2

The loan comes due within the current year and must be shown as current unless

Answer 2

the company can show that it has both the intent and ability to refinance.