Branch Company, a building materials supplier, has $18,200,000 of notes payable

Question

Branch Company, a building materials supplier, has $18,200,000 of notes payable due April 12, 2019. At December 31, 2018, Branch signed an agreement with First Bank to borrow up to $18,200,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2018, financial statements, the value of Branch's collateral was $19,800,000. On its December 31, 2018, balance sheet, Branch should classify the notes as follows:

A) $4,550,000 long-term and $13,650,000 current liabilities.

B) $18,200,000 of current liabilities.

C) $18,200,000 of long-term liabilities.

D) $14,850,000 long-term and $3,350,000 current liabilities.

Explanation / Answer

THe refinancing has been done to convert the short term debt of notes payable of Branch Company to a Long term debt. Hence, at the year end, it shall be classified as a a long term liability. However, this is available to the extent of collateral required by the Bank.

Here the collateral is 75%. The value of collateral as on 31st December 2018 was 19,800,000. Therefore, the classification shall be done as follows:

Long term = 19.8m*75% = 14,850,000

Short Term = 19,800,000-14,850,000 = 3,350,000

The correct answer is D.

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