Complete 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:
b) Reporting the current portion of a long-term note as long-term debt is a misrepresentation of the financial position of the company
Step-by-step explanation:
The Tony Hawk Skate Park has a 5-year installment loan with monthly payments of $5,000 including interest, but the first twelve monthly payments have been recorded as a current liability. We are told the VP of Finance, tells board members that he wants to classify the current portion of the installment note as long-term. The current portion of long-term liability would be the amount the company can repay during its operating cycle, the operating cycle in this case is 12 months.
Using the GAAP (Generally Accepted Accounting Principles), since it is paid within 12 months, the current portion of long term liability should be a current liability.
Therefore the VP's plan to classify the current portion of the installment note as long-term debt would be a wrong classification or misrepresentation of the financial position of the company.
The correct option is B.
