On December 31, 2014, Isle Co. has $4,000,000 of short-term notes payable due on February 14, 2015. On January 10, 2013, Isle arranged a line of credit with Beach Bank which allows Isle to borrow up to $3,000,000 at one percent above the prime rate for three years. On February 2, 2015, Isle borrowed $2,400,000 from Beach Bank and used $1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2014 balance sheet which is issued on March 5, 2015 is
A) $0.
B) $600,000.
C) $1,000,000.
D) $1,600,000.

Question

Quizplus · Accepted Answer

On December 31, 2014, the $4,000,000 short-term notes payable were due on February 14, 2015, and therefore should have been reported as a current liability. However, on February 2, 2015, Isle borrowed $2,400,000 from Beach Bank and used $1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. This means that only $600,000 ($4,000,000 - $3,400,000) of the short-term notes payable were still outstanding as of February 2, 2015. Since the current liabilities section of the December 31, 2014 balance sheet would have been issued on March 5, 2015, after the borrowings and repayment occurred, the remaining $600,000 would have been the only portion of the short-term notes payable still outstanding and should be reported as a current liability. Therefore, the correct answer is D. $1,600,000 ($4,000,000 - $2,400,000) of the short-term notes payable were paid off before the balance sheet date, and the remaining $600,000 should be reported as a current liability.