Question

Reunion BBQ has $4,000,000 of notes payable due on March 11, 2017, which Reunion intends to refinance. On January 5, 2017, Reunion signed a line of credit agreement to borrow up to $3,500,000 cash on a two-year renewable basis. On the December 31, 2016, balance sheet, Reunion should classify:
Multiple Choice

$500,000 of notes payable as short-term and $3,500,000 as long-term obligations.

$500,000 of notes payable as long-term and $3,500,000 as short-term obligations.

$4,000,000 of notes payable as short-term obligations.

$4,000,000 of notes payable as long-term obligations.

Answer 1

Answer:

$500,000 of notes payable as short-term and $3,500,000 as long-term obligations.

Explanation:

Short term liabilities are those liabilities which need to be paid within one year time and Long term liabilities are those liabilities which need to be paid after one year time.

In this question $4,000,000 of note payable with refinancing of $3,500,000 in following month after year end which means that the a payment of $500,000 ($4,000,000 - $3,500,000) is required in the following months. So, $50,000 will be short term liability and renewed fiance of $3,500,000 long term liability.