Question

On December 31, 2020, McDaniel Company had $1,200,000 of short-term debt in the form of notes payable due February 2, 2021. On January 21, 2021, the company issued 25,000 shares of its common stock for $38 per share, receiving $950,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2021, the proceeds from the stock sale, supplemented by an additional $250,000 cash, are used to liquidate the $1,200,000 debt. The December 31, 2020, balance sheet is issued on February 23, 2021. Show how the $1,200,000 of short-term debt should be presented on the December 31, 2017, balance sheet.

Answer 1

The $1,200,000 of short-term debt should not be classified as current liability on the December 31, 2020 balance sheet, as McDaniel Company managed to refinance the debt through a stock issuance and additional cash before the balance sheet was issued.

Step-by-step explanation:

The student's question involves determining the presentation of short-term debt on a balance sheet for McDaniel Company as of December 31, 2020, given the subsequent events that occurred before the balance sheet was issued on February 23, 2021.

Regarding the $1,200,000 of Short-Term Debt

On December 31, 2020, the company had a short-term debt of $1,200,000, due on February 2, 2021. However, on January 21, 2021, the company issued shares and received $950,000 in proceeds after taking into account brokerage fees and other costs. Together with an additional $250,000 cash, the company was able to repay this short-term debt on its due date, fulfilling its obligation.

Under generally accepted accounting principles (GAAP), when a company intends to refinance a short-term obligation or has the ability to do so and enters into a financing agreement for that purpose by the issuance date of the financial statements, it should not be classified as a current liability. Therefore, since McDaniel Company had generated sufficient cash before the issuance date of the balance sheet, the $1,200,000 should not appear as a short-term liability but instead could potentially be disclosed in a note explaining the refinancing made with post-balance sheet date funds.

Answer 2

Current Liabilities:Notes Payable 250,000

Long-term Debt:Notes Payable 950,000

Step-by-step explanation:

Calculation to Show how the $1,200,000 of short-term debt should be presented on the December 31, 2017, balance sheet.

Hattie McDaniel Company

Partial Balance Sheet

December 31, 2017

CURRENT LIABILITIES

Notes Payable 250,000

($1,200,000-$950,000)

LONG-TERM DEBT

Notes Payable 950,000

Therefore how the $1,200,000 of short-term debt should be presented on the December 31, 2017, balance sheet is:

Current Liabilities:Notes Payable 250,000

Long-term Debt:Notes Payable 950,000