Question

(Refinancing of Short-Term Debt) On December 31, 2017, Kate Holmes Company has \(7,000,000 of short-term debt in the form of notes payable to Gotham State Bank due in 2018. On January 28, 2018, Holmes enters into a refinancing agreement with Gotham that will permit it to borrow up to 60% of the gross amount of its accounts receivable. Receivables are expected to range between a low of \)6,000,000 in May to a high of \(8,000,000 in October during the year 2018. The interest cost of the maturing short-term debt is 15%, and the new agreement calls for a fluctuating interest at 1% above the prime rate on notes due in 2022. Holmes’s December 31, 2017, balance sheet is issued on February 15, 2018.

Instructions

Prepare a partial balance sheet for Holmes at December 31, 2017, showing how its \)7,000,000 of short-term debt should be presented, including footnote disclosure.

Short answer

Particular	Amount $
Current liabilities:
Note payable	$3,400,000
Long-term debt:
Note payable (refinanced in 2018)	$3,600,000
Total	$7,000,000

Step-by-step solution

Definition of Balance Sheet

A statement that represents the summary of all the resources the business holds and the obligations for which the business entity is liable is known as the balance sheet. It is also stated as a statement of financial position.

Partial balance sheet for Holmes

It is mentioned in the re-financing agreement that the company can borrow 60% of the value of the gross accounts receivable. It includes an interest cost of 1% above the prime rate. The company is wishing to replace its short-term note payable of $3,600,000 that is issued at 15% that are due in the year 2018. The amount that can be borrowed will range from $3,600,000 to $4,800,000. The business entity will classify $3,600,000 as long-term debt