On December 31, 20X2, Paxton Co. had a note payable due on August 1, 20X3. On January 20, 20X3, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, 20X3, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton's financial statements were issued on March 31, 20X3. How should Paxton classify the note on its balance sheet at December 31, 20X2?
a. As a long-term liability because no violation of any provision in the financing agreement exists.
b. As a long-term liability because the agreement does not expire within one year.
c. As a current liability because the lender is not expected to be financially capable of honoring the agreement.
d. As a current liability because the financing agreement was signed after the balance sheet date.
Management can estimate the amount of loss that will occur if the company does not prevail in a currently contested lawsuit. If losing the suit is reasonably possible, which of the following describes how the entity may report the loss contingency in the financial statements?
|Balance Sheet||Notes to Financial Statements|
|a.||Accrued as liability||Not disclosed|
|b.||Not accrued||Not disclosed|
|d.||Accrued as liability||Disclosed|
Notes payable are funds advanced to a company which are expected to be paid at periodic times with a designated interest rate. The notes are classified as either a current or non-current liability.
Answer and Explanation:
The answer is a. As a long-term liability because no violation of any provision in the financing agreement exists.
The company entered into a legally binding agreement which was financed after the balance sheet date but before the issuance of the balance sheet date. GAAP allows the reclassification of borrowing facilities if executed between the balance sheet date and issuance of the. Since the agreement was executed in January and funding was likely advanced in January, the classification can be completed however the subsequent event of the viability of the lender must be disclosed in the notes to the financial statements issued.
The answer is d. Accrued as a liability on the balance sheet and Disclosed
If a loss can be reasonably estimated and there is a loss probable, the loss should be accrued and disclosed.
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from Financial Accounting: Help and ReviewChapter 8 / Lesson 7