9. On December 31, 2016, L Inc. had a $1,500,000 note payable outstanding, due J
ID: 2340702 • Letter: 9
Question
9. On December 31, 2016, L Inc. had a $1,500,000 note payable outstanding, due July 31, 2017. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2017. In February 2017, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2017. On March 13, 2017, L issued its 2016 financial statements. What amount of the note payable should L include in the long-term liabilities section of its December 31, 2016, balance sheet?
Explanation / Answer
GAAP states that the amount excluded from current liabilities through refinancing cannot exceed the amount actually refinanced.Therefore L should consider the $1000000 ( 1500000 - 500000 ) paid by the refinancing to ne Long Term liability and the $500000 a current liability in the December 31 2016, balance sheet.The refinancing was completed before the issuance of the financial statements and meets both criteria for the classification of the $1000000 as a Long term liability.
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