Chapter 9, Problem 5P

Short-Term Debt Expected to Be Refinanced On December 31, 2019, Atwood Table Company has $8 million of short-term notes payable owed to City National Bank. On February 1, 2020, Atwood negotiates a revolving credit agreement providing for unrestricted borrowings up to $6 million. Borrowings will bear interest at 1% over the prevailing prime rate, will have stated maturities of 120 days, and will be continuously renewable for 120-day periods for 4 years. Atwood plans to refinance as much as possible of the notes outstanding with the proceeds available from this agreement. Assume that Atwood’s December 31, 2019, year-end financial statements are issued on March 30, 2020.

Required:

Prepare a partial December 31, 2019, balance sheet for Atwood showing how the $8 million short-term debt should be reported.

Next Level What is the justification for allowing short-term debt that is expected to be refinanced to be classified as a long-term liability.