Question

The Tony Hawk Skate Park has a 5-year installment loan with monthly payments of $5,000 including interest. Currently, the first twelve monthly payments have been recorded as a current liability. The VP of Finance, tells board members that he plans to classify the current portion of the installment note as long-term. He explains that lenders will be more willing to let the company borrow and will offer lower interest rate if the company reports fewer current liabilities.Multiple Choice
a. Classifying the first twelve installment payments as a current liability is not required by GAAP.
b. Reporting the current portion of a long-term note as long-term debt is a misrepresentation of the financial position of the company.
c. The ability to borrow at lower interest rates is more important than being ethical.
d. Presenting investors with a strong current ratio is acceptable at any cost.

Answer 1

Answer: b. Reporting the current portion of a long-term note as long-term debt is a misrepresentation of the financial position of the company.

Explanation:

According to US GAAP, the current portion of a long term liability (the portion that is to be paid in the current period) should be recorded as a Current Liability.

The Current portion of a long term liability thus shows us the amount is the current Liability that a company is due to pay in the current operating cycle.

To therefore put that amount that the company is supposed to pay in the current cycle as a long term liability is a misrepresentation of the books aimed at primarily deceiving lenders as the text shows.

Answer 2

Answer:

b. Reporting the current portion of a long-term note as long-term debt is a misrepresentation of the financial position of the company.

Explanation:

The present portion of Long term liability connotes the total sum of money that will be repayable by the company within its operating cycle. That is if the operating cycle is not specific, we consider the same as 12 months. as a result the present portion will have to represent the amount repayable within 12 months.

As per GAAP present portion of long term liability should be shown as a present liability in view of the fact that it is paid within 12 months.

Therefore the presentation of the current portion as long term debt is a misrepresentation of the financial position of the company.

Hence correct option is Option-b