Question

On December 31, 2020, Larkspur Company has $7,016,000 of short-term debt in the form of notes payable to Gotham State Bank due in 2021. On December 28, 2020, Larkspur enters into a refinancing agreement with Gotham that will permit it to borrow up to 61% of the gross amount of its accounts receivable. Receivables are expected to range between a low of $6,006,000 in May to a high of $8,008,000 in October during the year 2021. The interest cost of the maturing short-term debt is 15%, and the new agreement calls for a fluctuating interest at 1% above the prime rate on notes due in 2025. Larkspur December 31, 2020, balance sheet is issued on February 15, 2021. Prepare a partial balance sheet for Larkspur at December 31, 2020, showing how its $7,016,000 of short-term debt should be presented.

Answer 1

Answer:

Short term debt after the reclasification: 3,352,340

Explanation:

The company expect to borrow from their receivables.

As the lower amount expecteed for the receivables is 6,006,000

we will refinance up to 61% of this amount thus:

6.006.000 x 61% = 3.663.660

This is the amount the company will expect to refinance with new notes payable instead of honor the original note.

short term debt  7,016,000

less                    3,663,660 reclassified as long term

new short-debt  3,352,340‬