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 February15, 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 currentliability at December 31, 2017, the end of the fiscal year?

Short answer

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

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

Step-by-step solution

(a) Explanation on reporting of current liability

In the given case nothing will be reported as current liability, as it satisfies both the condition of intend 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, total $500,000 of note payable will be reported as current liability, as there is no intent of refinancing by long term debt, and also it does not exhibits the ability to use the refinanced funds for repayment.