The Tony Hawk Skate Park was built in early 2021. The construction was financed by a $3,000,000, 7% note due in 6 years, with payments of $51,147 required each month. The first year has not been as profitable as hoped. The discussion at the executive board meeting at the end of 2021 focused on the potential need to obtain additional financing. However, board members are concerned that the company's debt level at the end of 2021 will make the company appear too risky to additional lenders. The balance of the note at the end of 2021 is $2,583,026. By the end of 2022, the 12 monthly payments will reduce the balance by an additional $447116. Separate from the note, the company has the following amounts at the end of 2021: current assets of $3,100,000; current liabilities of $2,700,000; total equity of $4,000,000. Jim Trost, the VP of finance, tells board members that he plans to classify the full balance of the note at the end of 2021 as long-term because the full length of the note is six years. He explains that lenders will be more willing to let the company borrow and will offer a lower interest rate if the company reports fewer current liabilities. Plus, he plans to tell lenders that there is no problem with long-term solvency because the company long-term profits will be used to pay its long-term debt. Required: 1-a. Understand the reporting effect: By how much does Jim's decision affect the reported amount of current liabilities versus long- term liabilities as of December 31, 2021? Amount of misstatement 1-b. Should the 12 monthly payments to be made during 2022 be classified as current liabilities or long-term liabilities?
The Tony Hawk Skate Park was built in early 2021. The construction was financed by a $3,000,000, 7% note due in 6 years, with payments of $51,147 required each month. The first year has not been as profitable as hoped. The discussion at the executive board meeting at the end of 2021 focused on the potential need to obtain additional financing. However, board members are concerned that the company's debt level at the end of 2021 will make the company appear too risky to additional lenders. The balance of the note at the end of 2021 is $2,583,026. By the end of 2022, the 12 monthly payments will reduce the balance by an additional $447116. Separate from the note, the company has the following amounts at the end of 2021: current assets of $3,100,000; current liabilities of $2,700,000; total equity of $4,000,000. Jim Trost, the VP of finance, tells board members that he plans to classify the full balance of the note at the end of 2021 as long-term because the full length of the note is six years. He explains that lenders will be more willing to let the company borrow and will offer a lower interest rate if the company reports fewer current liabilities. Plus, he plans to tell lenders that there is no problem with long-term solvency because the company long-term profits will be used to pay its long-term debt. Required: 1-a. Understand the reporting effect: By how much does Jim's decision affect the reported amount of current liabilities versus long- term liabilities as of December 31, 2021? Amount of misstatement 1-b. Should the 12 monthly payments to be made during 2022 be classified as current liabilities or long-term liabilities?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:The Tony Hawk Skate Park was built in early 2021. The construction was financed by a $3,000,000, 7% note due in 6 years, with
payments of $51,147 required each month. The first year has not been as profitable as hoped. The discussion at the executive board
meeting at the end of 2021 focused on the potential need to obtain additional financing. However, board members are concerned that
the company's debt level at the end of 2021 will make the company appear too risky to additional lenders. The balance of the note at
the end of 2021 is $2,583,026. By the end of 2022, the 12 monthly payments will reduce the balance by an additional $447116.
Separate from the note, the company has the following amounts at the end of 2021: current assets of $3,100,000; current liabilities of
$2,700,000; total equity of $4,000,000.
Jim Trost, the VP of finance, tells board members that he plans to classify the full balance of the note at the end of 2021 as long-term
because the full length of the note is six years. He explains that lenders will be more willing to let the company borrow and will offer a
lower interest rate if the company reports fewer current liabilities. Plus, he plans to tell lenders that there is no problem with long-term
solvency because the company long-term profits will be used to pay its long-term debt.
Required:
1-a. Understand the reporting effect: By how much does Jim's decision affect the reported amount of current liabilities versus long-
term liabilities as of December 31, 2021?
Amount of misstatement
1-b. Should the 12 monthly payments to be made during 2022 be classified as current liabilities or long-term liabilities?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education