Dumars Corporation reports in the current liability section of its balance sheet at December 31, 2020 (its year-end), short-term obligations of $15,000,000, which includes the current portion of 12% long-term debt in the amount of $10,000,000 (matures in March 2021). Management has stated its intention to refinance the 12% debt whereby no portion of it will mature during 2021. The date of issuance of the financial statements is March 25, 2021. Instructions a.   Is management’s intent enough to support long-term classification of the obligation in this situation? b.   Assume that Dumars Corporation issues $13,000,000 of 10-year debentures to the public in January 2021 and that management intends to use the proceeds to liquidate the $10,000,000 debt maturing in March 2021. Furthermore, assume that the debt maturing in March 2021 is paid from these proceeds prior to the issuance of the financial statements. Will this have any impact on the balance sheet classification at December 31, 2020? Explain your answer. c.   Assume that Dumars Corporation, on December 15, 2020, entered into a financing agreement with a commercial bank that permits Dumars Corporation to borrow at any time through 2022 up to $15,000,000 at the bank’s prime rate of interest. Borrowings under the financing agreement mature three years after the date of the loan. The agreement is not cancelable except for violation of a provision with which compliance is objectively determinable. No violation of any provision exists at the date of issuance of the financial statements. Assume further that the current portion of long-term debt does not mature until August 2021. In addition, management has the contractual right to refinance the $10,000,000 obligation under the terms of the financial agreement with the bank, which is expected to be financially capable of honoring the agreement. 1.    Given these facts, should the $10,000,000 be classified as current on the balance sheet at December 31, 2020? 2.   Is disclosure of the refinancing method required?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

Dumars Corporation reports in the current liability section of its balance sheet at December 31, 2020 (its year-end), short-term obligations of $15,000,000, which includes the current portion of 12% long-term debt in the amount of $10,000,000 (matures in March 2021). Management has stated its intention to refinance the 12% debt whereby no portion of it will mature during 2021. The date of issuance of the financial statements is March 25, 2021.

Instructions

a.   Is management’s intent enough to support long-term classification of the obligation in this situation?

b.   Assume that Dumars Corporation issues $13,000,000 of 10-year debentures to the public in January 2021 and that management intends to use the proceeds to liquidate the $10,000,000 debt maturing in March 2021. Furthermore, assume that the debt maturing in March 2021 is paid from these proceeds prior to the issuance of the financial statements. Will this have any impact on the balance sheet classification at December 31, 2020? Explain your answer.

c.   Assume that Dumars Corporation, on December 15, 2020, entered into a financing agreement with a commercial bank that permits Dumars Corporation to borrow at any time through 2022 up to $15,000,000 at the bank’s prime rate of interest. Borrowings under the financing agreement mature three years after the date of the loan. The agreement is not cancelable except for violation of a provision with which compliance is objectively determinable. No violation of any provision exists at the date of issuance of the financial statements. Assume further that the current portion of long-term debt does not mature until August 2021. In addition, management has the contractual right to refinance the $10,000,000 obligation under the terms of the financial agreement with the bank, which is expected to be financially capable of honoring the agreement.

1.    Given these facts, should the $10,000,000 be classified as current on the balance sheet at December 31, 2020?

2.   Is disclosure of the refinancing method required?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Bond Amortization
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education