Question

On February 10, 2010, after issuance of its financial statements for 2009, House Company entered into a financing agreement with Lebo Bank, allowing House Company to borrow up to $4,000,000 at any time through 2012. Amounts borrowed under the agreement bear interest at 2% above the bank's prime interest rate and mature two years from the date of loan. House Company presently has $1,500,000 of notes payable with First National Bank maturing March 15, 2010. The company intends to borrow $2,500,000 under the agreement with Lebo and liquidate the notes payable to First National. The agreement with Lebo also requires House to maintain a working capital level of $6,000,000 and prohibits the payment of dividends on common stock without prior approval by Lebo Bank. From the above information only, the total short-term debt of House Company as of the December 31, 2010 balance sheet date is

a. $0.
b. $1,500,000.
c. $2,000,000.
d. $4,000,000.

Answer 1

As of the December 31, 2010 balance sheet date, House Company's total short-term debt is $0 because the existing debt with First National Bank is intended to be liquidated with the new financing from Lebo Bank, which matures after the balance sheet date.

Step-by-step explanation:

In response to the question about House Company's total short-term debt as of the December 31, 2010 balance sheet date, we must consider the provided information about the financing agreement with Lebo Bank and the existing notes payable. House Company plans to use the borrowed funds from Lebo Bank to liquidate its $1,500,000 notes payable with First National Bank, which matures on March 15, 2010. As the notes with First National will be paid off using the new loan from Lebo Bank and this loan from Lebo matures in two years from the date of the loan, which would be after December 31, 2010, the short-term debt that should be reported on the balance sheet on December 31, 2010, is $0.