A firm constructing a new manufacturing plant and financing it with short-term loans,which are scheduled to be converted to first mortgage bonds when the plant is completed,would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

Question

Quizplus · Accepted Answer

The construction loan is a specific short-term liability that is directly related to the building of the new manufacturing plant. It should be separated from the current liabilities associated with working capital when calculating net working capital because it is not a recurring operating expense. Once the plant is completed, the construction loan will be converted into long-term debt in the form of first mortgage bonds.

A Firm Constructing a New Manufacturing Plant and Financing It