On December 31, 2018, L Inc. had a $1,500,000 note payable outstanding, due July 31, 2019. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2019. In February 2019, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2019. On March 13, 2019, L issued its 2018 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2018, balance sheet?

Question

Quizplus · Accepted Answer

GAAP states that the amount excluded from current liabilities through refinancing cannot exceed the amount actually refinanced. Therefore, L should consider the $1,000,000 paid by the refinancing to be a long-term liability and the $500,000 a current liability in the December 31, 2018, balance sheet. The refinancing was completed before the issuance of the financial statements and meets both criteria (intent and financial ability) for the classification of the $1,000,000 as a long-term liability.