Question

At December 31, 2017, Burr Corporation owes \(500,000 on a note payable due February 15, 2018. (a) If Burr refinances the obligation by issuing a long-term note on February 14 and using the proceeds to pay off the note due February 15, how much of the \)500,000 should be reported as a current liability at December 31, 2017? (b) If Burr pays off the note on February 15, 2018, and then borrows \(1,000,000 on a long-term basis on March 1, how much of the \)500,000 should be reported as a current liability at December 31, 2017, the end of the fiscal year?

Short answer

(a) No obligations will be reported as a current liability.

(b) $500,000 will be reported as a current liability.

Step-by-step solution

(a) Explanation on reporting of current liability

In the given case nothing will be reported as a current liability, as it satisfies both the condition of intending to refinance the obligations by long-term liabilities and demonstrate an ability to consume the refinanced funds.

(b) Explanation on reporting of current liability

In the given case, a total $500,000 of note payable will be reported as a current liability, as there is no intent of refinancing by long-term debt, and also it does not exhibit the ability to use the refinanced funds for repayment.