Question

Short-term obligations can be reported as long-term liabilities if: a. The firm has the ability to refinance on a long-term basis. b. The firm intends to and has the ability to refinance as long-term. c. The firm has tentative plans to issue long-term bonds. d. The firm has a long-term line of credit.

Answer 1

Answer: b. The firm intends to and has the ability to refinance as long-term.

Explanation: While short term obligations are a firm's financial obligations that are due within a year or a normal operating cycle, long term obligations are due beyond a year and are listed on the firm's balance sheet.

Short term obligations (current liabilities) can be reported as long term liabilities if the firm intends to and has the ability to refinance (the revision of interest rate, payment schedule, and terms of a previous credit agreement as long-term).

This is possible because after the refinancing, the short term obligations are no longer due within a year.

Answer 2

Answer:

The answer is B.

Explanation:

Let's define the terms:

Short-term obligation is the obligation that will be repaid within a year. For example, a six-month loan or 12-month loan.

Long-term obligation is the obligation that will be repaid more than a year. For example, a bond.

Refinancing a loan is the process of repaying an existing loan with a new loan.

Refinancing a short term obligation on a long term means to replace short-term loan with a long term loan for an uninterrupted period extending beyond one year.

Under U.S. GAAP, there are certain conditions to be met before recognizing short-term obligations as long-term obligations:

if an entity has the intent and ability to refinance the obligation on a long-term basis, as demonstrated by either (1) the issuance of a long-term obligation or equity securities after the balance sheet date or (2) a financing agreement that clearly permits the entity to refinance on a long-term basis.