Question

On December 31, 2017, Kate Holmes Company has $7,000,000 of short-term debt in the form of notes payable to Gotham State Bank due in 2018. On January 28, 2018, Holmes enters into a refinancing agreement with Gotham that will permit it to borrow up to 60% of the gross amount of its accounts receivable. Receivables are expected to range between a low of $6,000,000 in May to a high of $8,000,000 in October during the year 2018. The interest cost of the maturing short-term debt is 15%, and the new agreement calls for a fluctuating interest at 1% above the prime rate on notes due in 2022, Holmes's December 31, 2017, balance sheet is issued on February 15, 2018. Prepare a partial balance sheet for Holmes at December 31, 2017, showing how its $7,000,000 of short-term debt should be presented. (Enter account name only and do not provide descriptive information.

Answer 1

Step-by-step explanation:

The partial balance sheet is prepared below:

Holmes

Partial balance sheet

December 31, 2017

Current liabilities

Note payable $3,400,000

Long term liabilities

Note payable estimated refinanced $3,600,000

The computation is shown below:

Note payable

= short term debt - account receivable × percentage given

= $7,000,000 - $6,000,000 × 60%

= $7,000,000 - $3,600,000

= $3,400,000

So only $6,000,000 would be reclassified, not the $8,000,0000 as it reflect the value of $4,800,000