Exercises on
FAS No. 6
Classification
of Short-term Obligations Expected to be Refinanced
Question No. 1
Pam, Inc. has $1,000,000 of notes payable
due June 15, 19X9. At the financial statement date of December 31,
19X8, Pam signed an agreement to borrow up to $1,000,000 to refinance the
notes payable on a long-term basis. The financing agreement, which
meets all of the conditions set forth in FAS No. 6, called for borrowings
not to exceed 80% of the value of the collateral Pam was providing. At
the date of issue of the December 31, 19X8 financial statements, the value
of the collateral was $1,200,000 and was no expected to fall below this
amount during 19X9. In its December 31, 19X8 balance sheet, Pam should
classify notes payable as:
Long-term $_________________
Current
$_________________
Basis for your answer:
Question No. 2
At December 31, 19X4, Reed Corp. owed notes
payable of $2,000,000 with a maturity date of March 15, 19X5.
On February 1, 19X5, Reed, being a seasonal business, had excess cash in
the bank. The cash will be needed later in the year for increased production
needs. Reed used the excess cash to pay off $900,000 of the notes
payable. Then, on March 15, 19X5, issued $2,000,000 of ten-year bonds,
using $1,100,000 to pay off the remaining notes payable and $900,000 to
replenish the cash account. Reed's December 31, 19X4, financial statements
were issued on March 29, 19X5. How should the $2,000,000 notes payable
should be classified in Reed's balance sheet at December 31, 19X4?
Long-term $_________________
Current
$_________________
Basis for your answer: