Question

Elmer Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 50,000 shares of common stock. If the stock is sold for $30 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?

a. $1,500,000
b. $2,500,000
c. $1000,000
d. $0

Answer 1

Elmer Corporation can retire $1,500,000 of its short-term debt by selling 50,000 shares at $30 each. Therefore, they can exclude $1,500,000 from current liabilities after the stock sale.

Step-by-step explanation:

The question addresses the retirement of short-term debt by Elmer Corporation using the proceeds from the sale of common stock. If Elmer Corporation sells 50,000 shares at $30 each, they would raise $1,500,000 (50,000 shares × $30 per share). Since Elmer Corporation has a short-term debt amounting to $2,500,000, they could exclude $1,500,000 from current liabilities after the sale of the shares. Therefore, the correct answer is a. $1,500,000.

To determine the amount of short-term debt that could be excluded from current liabilities, we need to calculate the proceeds from the sale of 50,000 shares of common stock. The proceeds can be calculated by multiplying the number of shares sold (50,000) by the selling price per share ($30). Therefore, the total proceeds from the sale of common stock would be $1,500,000 (50,000 x $30).

Since the proceeds from the sale of common stock are sufficient to retire the $2,500,000 of short-term debt, the amount of short-term debt that could be excluded from current liabilities is $1,500,000.