Question

Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2019. At December 31, 2018, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2018, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2018, balance sheet, Branch should classify the notes as follows: Group of answer choices $15,000,000 long-term and $3,000,000 current liabilities. $18,000,000 of long-term liabilities. $4,500,000 short-term and $13,500,000 current liabilities. $18,000,000 of current liabilities.

Answer 1

a. $15,000,000 long-term and $3,000,000 current liabilities.

Step-by-step explanation:

The B company can fetch the loan of $15,000,000 (20,000,000*75%) as per the loan agreement with F bank. Therefore, the B company can extend the notes payable due for payment on April 2019 for further time period, but the amount of $3,000,000 for which loan cannot be fetched shall be paid immediately. Therefore, the B company should classify $15,000,000 as long-term and $3,000,000 as current liabilities.