CFA Practice Question

CFA Practice Question

On December 31, 2007, Beta Inc. owed notes payable of $1,750,000, due on May 15, 2008. Beta expects to retire this debt with proceeds from the sale of 100,000 shares of its common stock. The stock was sold for $15 per share on March 10, 2008, prior to the issuance of the year-end financial statements. In Beta's December 31, 2007 balance sheet, what amount of the notes payable should be excluded from current liabilities?
A. $250,000
B. $1,500,000
C. $1,750,000
Explanation: If the firm intends to refinance short-term obligations on a long-term basis and demonstrates an ability to consummate the refinancing, the obligation should be excluded from current liabilities and reclassified as noncurrent. The ability to consummate the refinancing may be demonstrated by a post-balance-sheet-date issuance of long-term obligations or equity securities. Therefore, $1,500,000 (100,000 X $15) of the notes payable should be excluded from current liabilities and reclassified as noncurrent.

User Contributed Comments 11

User Comment
awlhoaln after Dec 31,2007 is adjusting event ?
thekapila How can u know exact amount before the event date? Because companies normally prepare financial statement months after the financial period ends. In this case, the company may prepare them in April. by then the event is known.
malawyer unfortunately, the question does not state the current debt will be refinanced with LTdebt but retired with equity which would not have the mentioned result?
jckasn It does not matter the company would use LT debt or equity. The notes payable, which is due in 5 months, should not be treated as a short-term debt because the company intends to pay it using either LT debt OR equity (refinance)!
CFunder I guess they haven't filed their financial statements before they entered into the sale of common stock. Seems like a long period of time between year end and date of share sale, guess they aren't a large accelerated filer.
Confucion Help me understand why this just wouldn't be considered a subsequent event and just disclosed?
mary11 How do they know they plan on refiancing it? It just says they plan to retire the debt with the shares.
naterinno its not a subsequent event because it was known before the year end ie) expects to retire this debt with the stock

it doesnt say it plans on refinancing however, which would classify the remainder as long term debt, or non current
berns23 I dont get it. The company expects to retire the debt from proceeds on sale of shares within a year. where did the word refinance come from>
cfastudypl expects to retire this debt with proceeds from the sale of > refinance
ashish100 weird. they should just borrow 250K instead then.
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