Van Rushing Hunting Goods\' fiscal year ends on December 31. At the end of the 2

Question

Van Rushing Hunting Goods' fiscal year ends on December 31. At the end of the 2016 fiscal year, the company had notes payable of $12 million due on February 8, 2017. Rushing sold 2 million shares of its $0.25 par, common stock on February 3, 2017, for $9 million. The proceeds from that sale along with $3 million from the maturation of some 3-month CDs were used to pay the notes payable on February 8.

Through his attorney, one of Rushing's construction workers notified management on January 5, 2017, that he planned to sue the company for $1 million related to a work-site injury on December 20, 2016. As of December 31, 2016, management had been unaware of the injury, but reached an agreement on February 23, 2017, to settle the matter by paying the employee's medical bills of $75,000.

Rushing's financial statements were finalized on March 3, 2017.

REQUIRED:

1) What amount(s) if any, related to the situations described should Rushing report among current liabilities in its balance sheet at December 31, 2016? Why?

2) What amount(s) if any, related to the situations described should Rushing report among long-term liabilities in its balance sheet at December 31, 2016? Why?

3) How would your answers to requirements 1 and 2 differ if the settlement agreement had occurred on March 15, 2017, instead? Why?

4) How would your answers to requirements 1 and 2 differ if the work-site injury had occured on January 3, 2017, instead? Why?

Explanation / Answer

Part 1)

The amount of current liabilities to be reported in the balance sheet at December 31, 2016 is calculated as follows:

Rushing has refinanced short term debt to the extent of $9 million on a long term basis. This portion will get treated as long term liabilities. The remaining amount of $3 million will be treated as short term debt/current liability. The amount towards employee's bill is to be treated as a loss contigency as on 31st December 2016. The information relating to settlement of liability after year end but prior to issuance of financial statements can be used for ensuring correct disclosure. This information would provide confirmation on the fact that the payment was probable and can be reasonably estimated.

__________

Part 2)

The amount of long term liabilities to be reported in the balance sheet at December 31, 2016 is $9 million.

The amount of short term debt refinanced with the use of stock sale is treated as refinancing on long term basis and will therefore, get reported as long term liabilities in the balance sheet.

__________

Part 3)

If the settlement had occurred on 15th March 2017, the payment of $75,000 towards employee's medical bills would not be treated as a current liability or a long term liability. It is so because such a payment couldn't have been considered as probable as on the date of issuance of financial statements. The answer to requirement 1 would be $3 million and to requirement 2 would be $9 million only.

__________

Part 4)

If the injury had occurred on 3rd January 2017 , the payment of $75,000 towards employee's medical bills would not be treated as a current liability or a long term liability. It is so because the liability had not taken place as of 31st December 2016 . The answer to requirement 1 would be $3 million and to requirement 2 would be $9 million only.

Portion of the notes payable not refinanced on a long-term basis through the stock sale 3,000,000 Liability for the payment of employee's medical bills 75,000 Current Liability $3,075,000

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