Read the scenario and associated questions below. Research the pertinent issues
ID: 364780 • Letter: R
Question
Read the scenario and associated questions below. Research the pertinent issues and explain accounting options for the scenario. Scenario You have recorded a revolving line of credit on your company's financial statements due within the next ten (10) months as a long-term liability. The board of directors of the company has asked you to explain why you have done so. The company has been in default with its loan covenants, but prior to the issuance of the financial statements, the bank granted a waiver. Winh releneto ht bfolowiq n 12 paragpapl each What is a line of credit? 1. 2. What promulgated accounting literature would your use to support your rationale What criteria should be met prior to reflecting this loan as a long-term liability? 4. described in your scenario? 3. Why would recording the loan as a long-term liability from a business standpoint of view make sense apart from compliance with promulgated standards? 5. What footnote disclosure would be necessary for the line of credit? Hint: Start by reviewing FASB current accounting pronouncement. Review other organizations' GAAP disclosures in SEC 10 K and 10 Q filing that you can find at the Yahoo website (http://finance.yahoo.com). You can find these types of disclosures in item 7 (critical accounting estimates).Explanation / Answer
1. the banker can give extra credit assistance to aborrower in some times, extending credit limits to borrower is called line of credit. some times the business people may need of shart term credit, which can be repay with in days or a in a week time. in these times, the banker have a chance to allow him to borrow additonal funds than his limits. it will be charge some high interest than normal level. it happens only when there is good relation between banker and customer, and these facilities are not offered to all.
2. if the customer is good in nature, there are no defaults in payments, if he carries good credity history, then there is no problem of extending credit to those. because the basic work of a bank is lending funds to clients and recover those with some interest. in line of credit the banker lend funds to the existed customers, who have good relation with banks. there is no question of default, and charge little higher interest than normal loans. hence, it is advisable to offer line of credit to good customers.
3. when the repayment is for a year or for more than one year, then it should be treated as long term liability. usually the bankers will give some time to the borrower, once the time is over, the repayment will be started by the borrower. a simple and best example is education loan, the student repay only after the education.
4. if the loan is repayed over a period of time, usually for more than one year, then it should be treated as long term loan. in opposite, short term loans are current liabilities to the firms, which should repay with in accounting period of the firm or with in one year from the borrowing.
5. the details of loan amount, what is the amount borrowed by the customers has to be noted on the footnote.
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