On December 31, 2014, Santana Company has $7,194,600 of short-term debt in the f
ID: 2505975 • Letter: O
Question
On December 31, 2014, Santana Company has $7,194,600 of short-term debt in the form of notes payable to Golden State Bank due in 2015. On January 28, 2015, Santana enters into a refinancing agreement with Golden that will permit it to borrow up to 56% of the gross amount of its accounts receivable. Receivables are expected to range between a low of $5,192,000 in May to a high of $8,014,000 in October during the year 2015. The interest cost of the maturing short-term debt is 15%, and the new agreement calls for a fluctuating interest at 1% above the prime rate on notes due in 2019. Santana's December 31, 2014, balance sheet is issued on February 15, 2015.
Prepare a partial balance sheet for Santana at December 31, 2014, showing how its $7,194,600 of short-term debt should be presented. Please show work.
Explanation / Answer
Long-term obligations are scheduled to mature beyond one year (or the operating cycle, if applicable) from the date of an enterprise's balance sheet.
Refinancing a short term obligation on a long term basis means either replacing it with a long term obligation or with equity securities or replacing it with short term obligations for an uninterrupted period extending beyond one year from the date of an enterprise's balance sheet.
Assessing whether a short term obligation is expected to be refunded: Historically, two approaches.
a. Enterprise intent and its prior ability to refinance.
b. Future ability to refinance as demonstrated by the existence of an agreement for long-term financing has been considered necessary.
a. Post balance sheet date issuance of a long-term obligation or equity securities.
b. Financing agreement. Before the balance sheet is issued, the enterprise has entered into a financing agreement that clearly permits the enterprise to refinance the short-term obligation on a long-term basis on terms that are readily determinable and all of the following conditions are met:
Short term obligations are those scheduled to mature within one year after the date of an enterprise's balance or within an enterprise's normal operating cycle if longer than one year.
Long-term obligations are scheduled to mature beyond one year (or the operating cycle, if applicable) from the date of an enterprise's balance sheet.
Refinancing a short term obligation on a long term basis means either replacing it with a long term obligation or with equity securities or replacing it with short term obligations for an uninterrupted period extending beyond one year from the date of an enterprise's balance sheet.
3 Paragraph 8 of chapter 3A of ARB No. 43 states that the current liability classification is not intended to include a contractual obligation falling due at an early date which is expected to be refunded.Assessing whether a short term obligation is expected to be refunded: Historically, two approaches.
a. Enterprise intent and its prior ability to refinance.
b. Future ability to refinance as demonstrated by the existence of an agreement for long-term financing has been considered necessary.
4 ASR No. 148 requires that commercial paper and other short-term debt be classified as a current liability unless (a) the borrower has a noncancelable binding agreement from a creditor to refinance the paper or other short-term debt; (b) the refinancing would extend the maturity date beyond one year; (c) the borrower's intention is to exercise this right. 8 Short-term obligations arising from transactions in the normal course of business that are due in customary trade terms shall be classified as current liabilities. 9 A short-term obligation other than one classified as a current liability shall be excluded from current liabilities only if the conditions in paragraphs 10 and 11 are met. 10 Intent to refinance-- the enterprise intends to refinance the obligation on a long-term basis.Ability to consummate the refinancing-- demonstrated in either of the following ways:
a. Post balance sheet date issuance of a long-term obligation or equity securities.
b. Financing agreement. Before the balance sheet is issued, the enterprise has entered into a financing agreement that clearly permits the enterprise to refinance the short-term obligation on a long-term basis on terms that are readily determinable and all of the following conditions are met:
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