Question

(Refinancing of Short-Term Debt) On December 31, 2017, Hattie McDaniel Company had \(1,200,000 of short-term debt in the form of notes payable due February 2, 2018. On January 21, 2018, the company issued 25,000 shares of its common stock for \)38 per share, receiving \(950,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2018, the proceeds from the stock sale, supplemented by an additional \)250,000 cash, are used to liquidate the \(1,200,000 debt. The December 31, 2017, balance sheet is issued on February 23, 2018.

Instructions

Show how the \)1,200,000 of short-term debt should be presented on the December 31, 2017, balance sheet, including note disclosure

Short answer

Answer

Particular	Amount $
Current liabilities:
Note payable	$250,000
Long-term debt:
Note payable	950,000
Total	$1,200,000

Step-by-step solution

Definition of Short-Term Debt

Short-term debt refers to the obligations that a business entity expects to complete within the operating period or one year. Such debts include short-term loans and commercial papers.

Representing the short-term debt on the balance sheet prepared on 31 December 2017

On 31 December 2017, the balance sheet of the company reflects the total value of notes payable as $1,200,000 that are due in February 2018. $950,000 of these notes payable are refinanced by issuing shares of common stock in January 2018 and the remaining notes payable of $250,000 are liquidated with the help of current assets.

Therefore $950,000 will be reported as long-term debt and $250,000 as a current liability in the balance sheet 2017.